Perfect Elasticity – Economics is considered as one of the most important subjects to learn for students, especially junior high school (SMP) and high school (SMA) students. This statement is certainly not without reason.
By studying economics, students can understand the wheel of money circulation that occurs in their daily life. Students will open their eyes and get the opportunity to understand a system that has been formed for a long time, until they finally understand and understand where they are.
There are lots of important topics that can be found in economics subjects. Students will be taught about economic motives, economic history, money, until in the end they will gain knowledge about microeconomics and macroeconomics.
In this article, Readers will study the topic of elasticity, especially perfect elasticity in the economic sphere. This topic is quite important to study, because later it will directly intersect with one of the most widely used theories mentioned in discussions about economics.
Definition of Elasticity
In the scope of economics, elasticity is a variable to measure the percentage change in one economic variable in response to the percentage change in another. It can be said that elasticity is a fairly important concept in studying economic theory.
The existence of elasticity allows one to understand and study various other economic concepts starting from the emergence of indirect taxes, the marginal concept related to the theory of companies, the distribution of wealth, and various types of goods related to the theory of consumer choice.
It doesn’t stop there, an understanding of the theory of elasticity is also important when discussing the distribution of people’s welfare in a country, especially in the scope of consumer surplus, producer surplus, and also government surplus.
The theory of elasticity can be found in various economic theories, where the concept of elasticity appears in several main indicators. Some examples of elasticity theory are price elasticity of demand, price elasticity of supply, income elasticity of demand, elasticity of substitution between factors of production, cross elasticity of demand, and elasticity of substitution over time.
Nevertheless, the most common elasticities found in the market and in economics subjects are price elasticity of demand and price elasticity of supply. The description of elasticity itself can be done using the following formula:
So, Readers can conclude that elasticity is a measure of the sensitivity of a variable to other variables. Variables that are highly elastic will respond more dramatically to changes in the variable on which they depend.
Elasticity itself is a material that you can find in class X of high school. For Readers who need material on elasticity or want to review the material on elasticity, they can try reading the book “SMA/MA Class 10 Economics Specialization Group IPS Curriculum 2013”.
Perfect Elasticity in Economic Scope
Readers needs to know that there are several responses that can be found when discussing elasticity. These responses can be perfect inelasticity, inelastic, unitary elasticity, elastic, and perfect elasticity. This article will only focus on discussing perfect elasticity.
Perfectly elastic means that the response to price is complete and infinite: a change in price causes quantity to fall to zero. That is, the goods offered will always have a lot of demand as long as the price of these goods does not change
Examples of goods that fall into the category of perfect elasticity are staple goods, such as oil, rice, sugar and so on. When the price of goods is stable, the demand will never run out and the supply will never stop.
It’s different if the price of groceries goes up just a little bit. This will affect the demand from the public, so that the supply of this object can even change to 0. Examples of other objects that have perfect elasticity can be found in fuel oil (BBM).
When fuel is experiencing a price spike, demand from the public will decrease and supply may change to 0. However, if the price is stable, then the supply and demand curves will be infinite, because these types of goods are goods that are needed.
If it is described in more detail, then the coefficient of perfect elasticity will be equal to infinity or ∞. You can pay attention to the table below as a form of representation of perfect elasticity. The following table represents perfect elasticity.
The table above is a representation of perfect elasticity in the economic sphere, more specifically in terms of demand elasticity. Nonetheless, Readers can also get the same result if you look at the supply elasticity curve.
History of the Definition of Elasticity
It is known that the definition of elasticity in the economic sphere was first used in the late 19th century by a figure named Alfred Marshall. He mentioned the definition of elasticity in his book entitled “Principles of Economics” which was published in 1890.
A little explanation about Alfred Marshall, himself an economist from England. Alfred Marshall was dubbed the “Father of Neoclassical Economics” because of his enormous influence in this field. The book Principles of Economics that Alfred Marshall published is considered to be a mecca besides neoclassical economics, as well as the realm of modern economics.
For this reason, when talking about the term elasticity, Readers will also mention a little about the discussion of neoclassical economics promoted by Alfred Marshall. Neoclassical economics itself contains many things involving the law of demand, supply and elasticity.
Basically, neoclassical economics is one of many economic approaches, in which the production, consumption and valuation (price) of goods and services are observed and driven by the law of supply and demand models.
So, according to this line of thinking, the value of a good or service is determined through hypothetical utility maximization by individuals. with limited income and also profits by firms that face production costs and use both the information and the available factors of production.
This approach is often justified by referring to rational choice theory, a theory that has been questioned a lot in recent years, which is why some Readers may hear the term “supply and demand” when talking about economics.
Neoclassical economics is known to dominate microeconomics and together with Keynesian Economics, also known as Keynesianism, formed the neoclassical synthesis that dominated mainstream economics as “neo-Keynesian economics” from the 1950s to the 1970s.
Therefore, neoclassical economics is considered to compete with Keynesian economics as a new form of explanation in describing macroeconomic phenomena from the 1970s to 1990s, which occurred when it was identified as part of the new neoclassical synthesis along with the new Keynesianism.
Readers who studies economics must have known very well how many economic theories can be found from various experts. However, if you are not focused on economics but want to try to learn a little about this scope, the book “Economic Triangle Theory” can be reading material for you.
Factors Affecting Elasticity
There are several factors behind the occurrence of elasticity in the economic sphere. However, because each elasticity has its own factors and indicators, this article can be too condensed and may confuse some of the Readers.
For this reason, we will discuss several factors that affect elasticity, especially in terms of elasticity of supply and elasticity of demand, which are the most common examples in discussions related to the topic of elasticity. Check out the discussion below.
Factors Affecting the Price Elasticity of Demand
The price elasticity of demand is a measure of how sensitive the quantity demanded is to its price. A simple example, when the price rises, the quantity demanded decreases for almost all goods, and when the price falls, the quantity demanded will also increase.
In this case, there are at least 8 factors that affect the price elasticity of demand, starting from the availability of substitutes, the extent of product existence, the percentage of people’s income, people’s needs, the duration of price changes, loyalty to a brand, who buys the goods and finally, the products that can be purchased. addictive.
1. Availability of Substitute Goods
The more and more close substitutes available, the higher the probability of elasticity. This is because people can easily switch from one item to another if there is a small change in price. If there are no substitutes, the demand is likely to be inelastic.
2. Breadth of Product Existence
The wider the existence of a product, the lower its elasticity. For example, a western food company will tend to have a relatively high elasticity of demand if there are substitutes available. Meanwhile, Indonesian specialty food companies may have very low demand elasticity because there are no substitutes.
3. Percentage of Community Income
The higher the percentage of consumer income represented by the product’s price, the higher the elasticity, because people will pay more attention when buying goods because of the cost. Generally, products that are more expensive tend to be inelastic because they cannot represent the wider community.
4. Community Needs
The more needed an item, the lower the elasticity, because people will try to buy it regardless of price. Some items that can affect a person’s life such as oxygen cylinders or the hormone insulin fall into that category.
5. Price Change Duration
For most goods and products, such as fuel or groceries, the longer a price change lasts, the higher the likely elasticity will be, as more consumers find they have the time and inclination to find substitutes.
6. Loyalty to a Brand
Attachment to a particular brand, either because of tradition or because of barriers to ownership, is known to reduce a person’s sensitivity to price changes, resulting in demand that tends to be inelastic.
7. Who Buys Goods
If there are buyers who do not directly pay for the goods they consume, such as by using a company expense account, or by credit card, demand tends to be more inelastic. Goods of this type are generally in the form of tertiary category goods.
8. Products that can be addictive
Goods that are more addictive tend to have inelastic ones. Examples include cigarettes, heroin and alcohol. This is because consumers treat these goods as needed and are therefore forced to buy them, regardless of significant price changes.
Factors Affecting Price Elasticity of Supply
Price elasticity of supply is a form of measure or indicator used in economics to show responsiveness, or also known as elasticity, and also the quantity supplied of a good or service to changes in its price.
There are at least 6 factors that affect price elasticity of supply, starting from the availability of raw materials, length and complexity of production time, mobility factors, time to respond to demand, availability of inventory and reserves or excess capacity in production. Here’s the presentation.
1. Availability of Raw Materials
For example, availability can limit the amount of gold that can be produced in a country regardless of price. Likewise, the price of a rare painting is of course unlikely to affect the supply of the painting.
2. Length and Complexity of Production Time
Quite a lot of objects depend on the complexity of the production process. An example is textile production which is relatively simple, so that the workforce is mostly unskilled and production facilities are nothing more than buildings and no special structures are needed, making the textile industry quite elastic.
3. Mobility Factor
If the factors of production are easily available and if a producer who produces one good can divert his resources and use them to create a product that is demanded, then it can be said that supply is relatively elastic. The reverse is true for this, to put it relatively inelastic.
4. Time To Respond To Requests
Simply put, the more time producers have to respond to price changes, the more elastic their supply will be. Conversely, if the time available for producers to respond to price changes is small, then the product becomes inelastic.
5. Existence of Inventory
A producer who has unused capacity can quickly respond to price changes in his market assuming that the variable factors are readily available. Of course this is different from manufacturers who do not have this capability.
6. Reserves or Excess Capacity in Production
The existence of spare capacity in a company, will show a more proportional response in the quantity supplied to price changes. This suggests that producers will be able to capitalize on the spare factor markets they have and therefore respond to changes in demand to match supply.
The law of demand and the law of supply has actually entered the scope of macroeconomics. This book “Introduction to Macroeconomics” can be a source of reading if Readers has an interest in studying topics related to macroeconomics and its surroundings.
The discussion above concludes this article. Earlier, Readers had studied various things about elasticity, starting from the definition of elasticity, perfect elasticity and also what factors affect elasticity. You even get a discussion on neoclassical economics and its history.
Hopefully this article can be useful for Readers who really need information about elasticity in the economic sphere. Or at least, hopefully Readers will be able to get new information that can be useful in the future.