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In economics, the concept of market price refers to the current price at which a good or service is being bought and sold in the market. It is determined by the interaction of supply and demand forces. Market price is influenced by various factors such as production costs, competition, consumer preferences, and government regulations.
Elasticity, on the other hand, is a measure of the responsiveness of quantity demanded or supplied to changes in price or income. It helps economists understand how sensitive consumers and producers are to changes in market conditions. Elasticity is calculated as the percentage change in quantity divided by the percentage change in price or income.
There are different types of elasticity measures, including price elasticity of demand (PED), price elasticity of supply (PES), and income elasticity of demand (YED).
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to changes in price. If the PED is greater than 1, demand is considered elastic, meaning that a small change in price leads to a relatively larger change in quantity demanded. If the PED is less than 1, demand is considered inelastic, indicating that a change in price has a relatively smaller impact on quantity demanded.
Price elasticity of supply (PES) measures the responsiveness of quantity supplied to changes in price. If the PES is greater than 1, supply is considered elastic, implying that a small change in price leads to a relatively larger change in quantity supplied. If the PES is less than 1, supply is considered inelastic, indicating that a change in price has a relatively smaller impact on quantity supplied.
Income elasticity of demand (YED) measures the responsiveness of quantity demanded to changes in income. If the YED is positive, the good is considered a normal good, meaning that as income increases, the quantity demanded also increases. If the YED is negative, the good is considered an inferior good, indicating that as income increases, the quantity demanded decreases.
Understanding market price and elasticity is crucial for businesses, policymakers, and economists. It helps businesses determine the optimal pricing strategy, forecast demand and supply, and make informed production decisions. Policymakers can use elasticity measures to assess the impact of taxes, subsidies, or regulations on market outcomes. Economists rely on these concepts to analyze market behavior, predict market responses, and evaluate the efficiency of market outcomes.