The Significance of Elasticity to Entrepreneurs

The relationship between price and quantity can be either directly proportional (in favor of supply) or inversely proportional. When price increases, it is expected that quantity demanded will decrease (Law of Demand) and quantity supplied will increase (Law of Supply); and when the price decreases, it follows that quantity demanded will increase and quantity supplied will decrease.

On the other hand, we have a knowledge that the demand and supply are kinetic in a competitive market. Both of them respond to changes in price and other factors, you can see them especially when you graph a supply and demand graph. Because of this, the observed results present some shifts in supply and demand curves as reactions to the changes in these various determinants. This is where elasticity comes. The degree to which the curves graphed react to these changes is referred to as elasticity.

There are many concepts of elasticity in economics that are widely used by sellers, businessmen, or entrepreneurs. It helps them in pricing decisions for better revenues. The examples of elasticity in economics are:

• Price Elasticity of Demand/Supply
• Income Elasticity of Demand
• Cross Elasticity of Demand

The Price Elasticity of Demand is the point of responsiveness of quantity demanded to a change in the price of a good or service demanded by the consumers. As for the Supply, if the supply is elastic. Producers are now able to increase production and they can even increase the cost of production. It helps the Entrepreneurs to know what to do to the kinetic effects that happen involving the elasticity. Especially in the price. The price elasticity, especially in supply, helps entrepreneurs to adapt to their changes in supply and demand for increased revenues.

Income Elasticity of Demand is the degree of responsiveness of a percentage change in quantity demanded with a percentage change in income. When the result you’ve got from a given formula when computing is greater than 1, the product manufactured is called a normal good but is also considered as a luxury. This often occurs when an increase in a consumer’s income has caused a substantial increase in the demand for a product. However, when the result is less than 0, or a negative number, the good is said to be inferior. A good is said to be unitary when the elasticity equals 1. This helps Entrepreneurs/sellers to know how consumers perceive what kind of goods they sell.

Lastly, Cross Elasticity of Demand is another degree of responsiveness of a percentage change in quantity of a good with a percentage change in the price of other goods. It indicates the relationship between two goods. It is important for an entrepreneur to know if his/her product is a complement of, or a substitute for another good, especially if the other good is doing well in the market.