Elasticity is taken as a unit-free measure, and economists use it to compute the alterations among markets with no need to standardize the units of measurement. The sensitivity of quantity demanded or supplied to price is measured in terms of elasticity. Demand elasticity is the extent of sensitivity due to changes in price and other factors. There are three ways to measure demand elasticity: price elasticity of demand, cross elasticity of demand, and income elasticity of demand. One application of demand elasticity is that it is used to determine the prices.
When the price elasticity of demand has a value of more than one, then producers will lower the price of a product (Mücka). For example, in the case of inferior goods, the quantity demanded of the goods increases when there is a rise in income. Similarly, supply elasticity is the extent of sensitivity due to changes in price and other factors. With higher price elasticity, the firm becomes more competitive in the market and earns more profits. Price elasticity can be improved by developing spare capacity and using the latest technology in the firm’s operations.
An externality refers to an economic cost as well as a benefit in the form of a byproduct of any economic activity. In the presence of externalities, resources get misallocated in the economy. Externalities can be positive as well as negative results of different economic activities. There is a positive externality when a third party is getting benefits from the manufacturing of a certain good. There is a disadvantage of these positive externalities that they lead to market failure in the long run. When a firm bears external costs but gets no external benefits, this is known as a negative externality. For example, when a firm is engaged in production, there is pollution in the environment as a result. Then, this is referred to as a negative externality.
Works Cited
Mücka, Stefanie. “Price Elasticity of Demand and its Effect on Revenue.” (2014).
