Elasticity Concept.html

Elasticity Concept

“A measure of responsiveness used in demand analysis is elasticity.  The concept of elasticity simply involves the percentage change in one variable associated with a given percentage change in another variable. Elasticities are often used in demand analysis to measure the effects of changes in demand-determining variables. The elasticity concept is also used in production and cost analysis to evaluate the effect of changes in input on output, and the effect of output changes on costs. In finance, elasticity is used to measure operating leverage “(Hirschey, 2009, 170).

“Factors such as price, product quality, and advertising that are within the control of the firm are endogenous variables. Factors outside the control of the firm, such as consumer incomes, competitor prices, and the weather, are exogenous variables. Both types of influences are important. For example, a firm must understand the effects of changes in both prices and consumer incomes to determine the price cut necessary to offset the decline in sales caused by a business recession. Similarly, the sensitivity of demand to change in advertising must be quantified If the firm is to respond appropriately to increase in competitor advertising” (Hirschey, 2009, 170).

Reference:

Hirschey, M. (2009). Fundamentals of managerial economics, (9th ed.). Boston, MA: Cengage Learning.

“The price elasticity of demand measures the responsiveness of quantity demanded to changes in the price of the product itself. With elastic demand, a price increase will lower total revenue and a decrease in price will raise total revenue. With unitary elasticity the effect of a price change is exactly offset by the effect of a change in quantity demanded and total revenue is constant” (Hirschey, 2009, 185).