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394Elasticity and Market structures The first part will be the explanations of any two types of elasticity with examples and diagrams The other section will be about any two market structures with comparisons between them Elasticity Elasticity is largely the behaviour of product markets and degree of responsiveness of quantity demanded and supplied of a commodity to correlation with the consumers income and producers price It tells from where consumers demand arises how businesses makes decisions and how prices and profits efficiently coordinate the allocation of scarce resources in a perfectly competitive market Samuelson et al 1995 There are two kinds of elasticity Elastic is when the price has a huge affect on the demand or supply like tea coffee Inelastic is when the price does not have a vast affect on the demand or supply For example necessities like salt and precious items like jewellery There are four main types of elasticity price income and cross elasticity of demand and price elasticity of supply Price elasticity of demand PED It measures the responsiveness of demand after a change in price Pettinger 2016 Price elasticity can be calculated by PED change in quantity demanded change in price The different classification for price elasticity are
1 Perfectly elastic demand When goods are bought at the going price but nothing at all if the price rises slightly For example International students prefer buying daily wear clothes from Primark but if the prices rise they will switch to brands as there will not be a massive difference between the two Price D Ep 0 Quantity 2 Perfectly inelastic demand When the price has no affect on the change of quantity demanded like necessities medicines Price D Ep 0 0 Quantity 3 Unitary elastic demand When the percentage change in price is equal to the percentage in quantity demanded Such a demand curve is referred to as a rectangular hyperbola Price D 0 Quantity Ep 1 4 Relatively inelastic demand When a change in price leads to a smaller percentage change in demand For example necessities goods that are addictive or have few close substitutes Pettinger 2016 Price D Ep 1 0 Quantity 5 Relatively elastic demand When a change in price leads to a bigger percentage change in demand They are mainly luxury and expensive goods Pettinger 2016 Price D Ep 1 0 Quantity Elasticity does not depend upon units some actual calculations are needed 1 Point elasticity of demand It is the elasticity on a point of the demand curve It is formed by multiplying the inverse of the slope at the point by a ratio Morgan Katz and Rosen 2006 2 Arc elasticity of demand It is the elasticity measured over a finite range or arc of a demand curve Sethi and Andrews 2017
When the change in income is equal to the change in price Elasticity is equal to unity 2 Negative income elasticity When quantity demanded at any given price decreases as income increases These goods are negative in nature and are referred as inferior goods For example maize and pearl millet 3 Zero income elasticity When income increases but quantity demanded remains unchanged For example inexpensive essential goods Market structure The market structure refers to the number which affect the level of competition in the market Neo classical theory of the firms distinguishes a number of market structures each with its own characteristics and assumptions Structures are classified in term of the presence or absence of competition When competition is absent the market is said to be concentrated There is a spectrum from perfect competition to pure monopoly Economics online 2018 Monopoly It is a single supplier to a market This firm may choose to produce at any point on the demand curve Snyder and Nicholson 2008 The products sold will be of lesser quantity and higher price This imposes a cost on society because fewer consumers buy the product and those who do not pay more for it This is why antitrust laws exist which forbid firms from monopolizing most markets Pindyck and Rubinfeld 2005
