Elasticity measures the reactions of the customers, business and other shareholders to a change in demand or supply. There are three kinds of elasticity: 1) Price elasticity, 2) Income elasticity and 3) Cross elasticity.
Price Elasticity: Price elasticity means if the price of the product changes then what would be the reaction of the customers to the demand or considering supply a change in the price will have reaction from the suppliers.
Demand Price Elasticity: (The change in price/price)/(The change in demand/demand)
Supply Price Elasticity: (The change in price/price)/(The change in supply/supply)
If the price elasticity is 1 then customer will decrease his demand with the same rate of the price change. If it is more than one then the customer will decrease his demand quantity more than the price change rate. If the elasticity is less than 1 then the customer will decrease his demand quantity less the rate of the change in price.
Income elasticity: The customer reacts to demand after a change in his income. When income increases then the customer will demand more/less from some certain goods. When income increases and the customer demands less from a certain good, this good is called inferior good. If the customer demands more, this good is called a normal good.
Cross elasticity: This kind of elasticity measures of the reaction of customers against goods by increasing or decreasing their demands with respect to the changes in prices of many goods.
Market Failures: Public Goods and Externalities
Public goods are the goods which cannot be divided and priced. Public goods have a very large externalities. National security services is the best example of these kind of goods. You cannot charge a citizen of the national security with his share because you cannot define how much a customer uses this good. However we know that national security services are very important. If we are not safe, we cannot do business, we can get education or even we might be in danger all the time. Free market cannot produce such goods because they require very costly investments and there is no profit for the producer. So the Government has to produce such goods and finance them with the taxes collected from people.
Businesses and Their Costs
Businesses are so important for economies. If an economy can promote creating new businesses than this economy becomes lively and people can gain enough income. Welfare level becomes higher relatively. One of the most important thing for the businesses are the costs. A business should be able to manage its costs. Costs can be classified in a few groups: 1)Indirect and direct costs 2) Fixed and variable costs 3) Actual and budgeted costs, 4) Production costs in different time intervals (Costs in short, middle and long term).
Indirect costs are the costs that business does not face directly however business produces a costs. Best example for this is a club. Clubs makes noisy music which disturbs neighbors, and that is a cost. However mostly the business does not pay this cost. Direct costs are charged directly to the business. For example, when a business buy some raw materials, the business is charged for this.
Fixed costs: A kind of cost which does not depend on the quantity of the products produced by the business. Best example is a building a business uses. The money spent for the building does not depend on the quantity of the products.
Variable cost: The cost kind depends on the quantity of the products produced by a business. Raw materials to produce hamburger is a good example for this.
Actual cost: The expost cost of a company is called actual cost. Which means after finishing a term, a business can see how much it spent on the products bought for the company.
Budgeted cost: It is the planned cost before starting a term.
What I have learned from the course:
After this course I can follow and understand consumer behaviors and I can develop some strategies to make the customers more satisfied. I know that I need to make them like my products and that means I need to follow elastic figures for the business. If a group customers are very sensitive to the prices then it is required to consider any change in price very carefully.
I have seen some customers’ behaviors against sellers offers. The customers firstly check the prices of the products mostly and then they check the quality mostly. Actually that depends on their income also. In a rich neighborhood the customers reactions to the prices are very different with respect to the people’s behaviors in a poor neighborhood.
Another thing I have learned the costs of businesses. When running a company I can follow the costs and think on them how to manage. Being aware of the costs, I can easily calculate my profits so I can see what I should to in the next term.
In my workplace, I can see how our spending are done. So to show that I am a good worker, I am using how to decrease the costs at workplace. For example, in the work processes I am in, I watch the steps and try to find or create new ways to decrease the costs. Instead of hiring many people, increasing some workers’ abilities and giving them some rise in their wages may create a decrease in costs.
