Elasticity is taken as unit-free measure and economists use it to compute the alterations among markets with no need of standardizing 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 the demand elasticity; price elasticity of demand, cross elasticity of demand as well as income elasticity of demand. One application of demand elasticity is that it is used to determine the prices. When price elasticity of demand has value more than one, then producers will lower the price of a product (Mücka). For example, in case of inferior good, quantity demanded of good 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 as well as using the latest technology in firm’s operations.
An externality is referred to an economic cost as well as benefit in the form of a byproduct of any economic activity. In the presence of externalities, resources get misallocate in the economy. Externalities can be positive as well 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 these lead to market failure in the long run. When a firm is bearing external costs but getting no external benefits then this is known as a negative externality. For example, when a firm is engaged in the production and as a result of this, there is pollution in the environment. Then this is referred as a negative externality.
Mücka, Stefanie. “Price Elasticity of Demand and its effect on Revenue.” (2014).