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The Concept of Elasticity in Microeconomic Reasoning

The concept of elasticity is being investigated by numerous economists nowadays as it has become an inevitable part of business planning, theory of the firm, and proper understanding of theory of the consumer choice. Economic phenomenon of elasticity is observed in measurement of supply and demand, which are closely connected to each other in any business. In this case, neoclassic economic theory focuses on economic variables, which are influenced by the change of other economic variables. In other words, if one economic variable changes in business, another one changes as well. For example, a businessman who owns a shop has to understand the fact that if the price for its products becomes lower, the demand for its products can increase significantly as customers will not buy the same but more expensive product in another shop. It means that the concept of elasticity deals with competitiveness as well. In any case, business people should know how to calculate elasticity in order to know if such changes can be beneficial for their businesses. In accordance with William Boyes and Michael Melvin (2012, p.103) “the price elasticity of supply is a percentage change in the quantity supplied of a good or service divided by the percentage change in the price of that good or service, everything else held constant.” This number is usually considered to be either zero or positive. If quantity of products supplied does not  change considerably because of fluctuations in price, such kind of elasticity is considered to be a zero one. For example, if a business person deals with works of art created by people who are already dead, it is natural that the price elasticity in this situation is zero because the quantity of these products will not change even if their price changes. Positive price elasticity demonstrates the phenomenon of an increase of quantity of goods because of increase in price. On the other hand, perfectly elastic supply curves are always horizontal because they show that even though the price has not changed considerably, the quantity still rises. For instance, the cost of food has not varied much but an increase in its quantity is obvious.

Time is also an influential factor for price elasticity. Nowadays numerous economists divide different periods of time into long and short runs. For example, taking into consideration tendencies of elasticity, businessmen are able to estimate if they have enough time to open or reopen new shops, construct new plants or factories, and find new qualified workers. It is commonly known that in a short run economists need to create new business policy in order to make their company more successful.

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Taking into consideration all aspects of price elasticity, it is necessary to calculate it in a proper way. William Boyes and Michael Melvin (2012, p. 104) provide the following formula for calculating both price elasticity of supply and  price elasticity of demand. The formula is presented below:

%u2206Q/%u2206P %u2219 P/Q.

Authors admit that “the higher is the number, the more elastic is supply.” Price elasticity of supply and price elasticity of demand are closely interrelated. Understanding the impact of price on the market is almost impossible without observing the elasticity of the product. Here two scenarios are possible: the one where demand is very elastic and the one where demand is very inelastic. William Boyes and Michael Melvin (2012, p.104) claim that “if demand is very elastic, then shifts in the supply curve will result in large changes in quantity demanded and small changes in price and at the equilibrium point.” If demand is considered to be very inelastic, the situation is very different. This is because shifts of the supply curve demonstrate the change of price, while the change of quantity is not considerable at the equilibrium point.

To top it up, any changes of price or quantity of a product can be shown on the curve. If these changes take place, the curve changes too. However, changes of the curve are influenced by the elasticity of goods supplied.

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Taking into account all factors associated with elasticity, it is possible to say that its role is really important in microeconomics. It has already become a significant factor which contributes to a success of a company, firm, plant, or shop without an investigation of all aspects of either price elasticity of supply or price elasticity of demand. Moreover, calculation of the elasticity and observing it on the curve made it possible for numerous business people to create the most successful business strategies for their companies. This fact makes microeconomics of the whole country provide producers and consumers with numerous opportunities.

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