Answer to Question #202183 in Microeconomics for zain ul abdeen

Question

Explain the elastic ,inelastic and unit elasticity and draw the graphs? How the concept of elasticity is helping for agriculture sector and for tar collection authorities?

Answer 1

Elastic

A good is said to have an elastic demand if a change in price results in a large change in quantity demanded.

In the above diagram, a slight fall in price from P1 to P2 results into a large increase in demanded quantity from Q1 to Q2 hence the demand for the commodity is said to be elastic.

Inelastic

A goo is said to have an inelastic demand if a change in price results in only a small change in quantity demanded.

In the above diagram, the quantity demanded is not very responsive to changes in price hence the commodity has an inelastic demand.

Unit elasticity

If the elasticity coefficient is equal to one, the demand is said to be unit elastic.

The concept of elasticity is important in the agricultural sector for the determination of prices of factors of production. If the demand of a factor is inelastic, its price will be high and if it is elastic, the price will be low.

The taxing policy relies on relative price elasticity of supply and demand. Buyers pay high tax when the supply is more elastic than demand and producers bear more tax when the demand is more elastic than the supply. Therefore, the more the inelastic the demand and supply are the larger the tax revenue.