Elasticity

There are four types of elasticity, each type a measure of the relationship between economic variables such as quantity, price, and demand. When a good or service has a high elasticity, that means that changes in one variable greatly affect the variable it is compared to. When a good or service is inelastic, that means that changes in one variable have little to no effect on another. The elasticity depends on what two variables we are using, and which goods/services we are observing. Elasticity is important to understand especially for sellers, because they are able to gauge how consumers will react after a price change, and how much of a good/service they will buy.

The first type is the price elasticity of demand (PED). This is the type we learned in class on the spending project, and has to do with the changes in quantity demanded after a price change. A high PED (or greater than 1) means that when the price of a good or service changes, the quantity demanded changes along with it, often at a high rate. For example, if the price of Starbucks coffee goes down, more people will  likely buy more Starbucks coffee. On the other hand, if the price increases, more people are likely to buy less, or turn to other options like Peets. Inelastic PED (less than 1) means that changes in price have little to no effect on quantity demanded. For example, subscriptions to streaming services are fairly inelastic, because a drop in price will not make a person buy multiple subscriptions, and an increase is not likely to make a person stop, until the price becomes too high and people do not buy any subscriptions. The way to find a good or service's elasticity is shown below. A value of one is known as "unit elastic." The value is always negative, as price and demand have an inverse relationship. PED is most useful to firms so they can understand how to price their products, because they know how consumers will react to price changes.

The second type is the price elasticity of supply (PES). This measures the change in quantity supplied after a change in price. An example of an elastic good (>1) in terms of PES is pizza; if the supply is low and it is in high demand, the price will rise, and suppliers will produce more of the good (to meet the high demand and increase profit). An example of an inelastic good/service (<1) is concert tickets, or anything where supply is always limited. The price can rise for concert tickets, but since there is a limited number of seats at a venue, the supply cannot increase. The equation for PES, shown below, will always produce a positive value, because price and supply are directly related. PES is determined by other factors, such as the ability and mobility of workers, storage space, and production complexity. A high PES is desirable, because firms can then increase quantity supplied and, therefore, their profits.

The third type is the cross elasticity of demand (XED). XED measures the change in quantity demanded of good/service A after a change in the price of good/service B. When XED is positive, the two goods are substitutes, because a increase in price for one good (such as Pepsi) means an increase in demand for its substitute (such as Coca Cola), and vice versa. The greater the XED value (greater elasticity) means the two are greater substitutes. When XED is negative, the two goods are complementary, such as iPhones and iPhone cases. If the price of the iPhone X increases, the demand for iPhone X cases will decrease, meaning an inverse relationship and a negative XED value. The closer this value is to zero (inelastic), the less complementary the two goods/services are. This is useful to firms for figuring out their rivals (who produce substitutes), and those that produce complementary goods. It is also useful for understanding how to minimize risk through methods such as horizontal integration and vertical integration.

The fourth type is the income elasticity of demand (YED). This describes the change of quantity demanded for a good/service after a change in income. For normal goods, this is positive, because the two have a direct relationship; for example, if income rises, people will have more demand for new cars. If income falls, people will have a lower demand for new cars. Normal goods are usually not necessities like food. The higher this value is (more elastic), the more people will respond and increase their demand after an increase in income. If the value is negative, the good is inferior, and that means demand decreases after an increase in income (or vice versa) which can be a good like a cheap food item. The more negative the value (greater elasticity) means the good/service is very inferior. Firms can use this value to know how much of a good to produce after a change in income, and how to price the good.

Overall, knowledge of a good/service's different types of elasticity is useful for firms so that they can predict consumer response to certain changes, and so they can know what to price their goods/services and how many to produce.

Sources:
https://www.economicsonline.co.uk/Competitive_markets/Elasticity.html
https://investinganswers.com/dictionary/e/elasticity
https://www.investopedia.com/terms/e/elastic.asp
https://investinganswers.com/dictionary/e/elasticity-supply