the following in 200 to 300 words and provide an example th…

Question 1: What is the concept of elasticity and how is it measured?

Elasticity refers to the responsiveness or sensitivity of a particular economic variable to changes in another related variable. It measures the extent to which changes in one variable will result in changes in another variable. Generally, elasticity is used to assess the degree of responsiveness of demand or supply to changes in price, income, or other factors.

The most commonly used elasticity measure is price elasticity of demand (PED), which measures the responsiveness of quantity demanded to changes in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. A PED value above 1 indicates elastic demand, meaning that the quantity demanded is highly responsive to price changes. On the other hand, a PED value below 1 indicates inelastic demand, implying that the quantity demanded is not very responsive to price changes. For example, if a 10% increase in price leads to a 20% decrease in quantity demanded, the PED would be -2, indicating elastic demand.

Additionally, income elasticity of demand (YED) measures the responsiveness of quantity demanded to changes in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. A positive YED indicates a normal good, meaning that as income increases, the quantity demanded also increases. Conversely, a negative YED indicates an inferior good, where an increase in income leads to a decrease in quantity demanded. For example, if a 10% increase in income leads to a 5% increase in quantity demanded, the YED would be 0.5, indicating a positive income elasticity for a normal good.

Question 2: What is the difference between price elasticity of demand and income elasticity of demand?

Price elasticity of demand (PED) and income elasticity of demand (YED) are both measures of elasticity, but they assess different relationships.

PED measures the responsiveness of quantity demanded to changes in price, while YED measures the responsiveness of quantity demanded to changes in income. PED focuses on the relationship between price and quantity demanded, determining how much quantity demanded will change in response to a change in price. On the other hand, YED focuses on the relationship between income and quantity demanded, explaining whether a good is normal or inferior based on how quantity demanded changes with changes in income.

Furthermore, PED is always negative due to the inverse relationship between price and quantity demanded, whereas YED can be positive, negative, or zero. A positive YED indicates a normal good, as quantity demanded increases with an increase in income. A negative YED indicates an inferior good, as quantity demanded decreases with an increase in income. A YED of zero indicates a necessity, where changes in income have no impact on quantity demanded.

In terms of calculation, PED is determined by dividing the percentage change in quantity demanded by the percentage change in price, while YED is determined by dividing the percentage change in quantity demanded by the percentage change in income.

For example, let’s consider a luxury car brand. If a 10% increase in price leads to a 25% decrease in quantity demanded, the PED would be -2. This indicates that the luxury cars have elastic demand and are highly responsive to price changes. Now, suppose that a 10% increase in income leads to a 20% increase in quantity demanded. In this case, the YED would be 2, indicating that luxury cars are a normal good and that an increase in income leads to an increase in quantity demanded.

In summary, PED and YED are essential concepts in economics that capture the responsiveness of demand to changes in price and income, respectively. Both measures provide valuable insights into consumer behavior and help understand the dynamics of the market.