Elasticity: The Changes In Demand And Supply Of Goods

Name Institutional Affiliation Course Code/Title Instructor Date Elasticity Elasticity can be defined as the ratio of the relative change of one (dependent) variable to changes in another (independent) variable. The term elasticity can be used to explain the changes in demand and supply of goods when there is a change in price. There are four types of elasticity that can be used to explain the behavior of a product due to a change in the price. Perfectly elastic demand is a demand where consumers are prepared to buy all that they can at a certain and none if the price is increased. Demand is said to be perfectly inelastic if changes in price do not affect the quantity demanded. Perfectly inelastic goods are bought out of necessity, for example, insulin which a diabetes patient cannot do without. Another type of elasticity is inelastic demand; this is whereby changes in price bring about changes in quantity demanded in less proportion so that elasticity is less than one. Goods that have this type of behavior include beer and cigarettes. The final type of elasticity is unit elasticity of demand; this is whereby changes in price bring about changes in quantity demanded in the same proportion and the elasticity of demand is equal to one. Different factors affect the elasticity of a product; they include the following nature of the commodity, ease of substitution, consumer’s income, the number of uses to which the commodity can be put, prices of other products, advertisements especially persuasive ones and tax policies (Backhaus & Wagner, 65). Tax policies put in place by a government can have a huge effect on the number of goods consumed by the citizens of a country; this depends on whether the product being taxed is a necessity to the citizens of a country. Tax policies have different effects on consumers and producers. When taxes are imposed this sometimes leads to a change in the demand for the product. This is because some companies prefer to shift the burden of cost to the consumer. This leads to an increase in the price that a consumer has to pay to get a certain product. When the price of a commodity that is a necessity increase there are no effects felt, because people still need to consume the commodity Backhaus & Wagner, 287). For example, when a tax is imposed on cancer medication, there would be no change in the demand because cancer patients requir...