5: Elasticity
- Page ID
- 181237
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)- 5.0: Introduction
- This page discusses the concept of elasticity in economics, focusing on price elasticity of demand and supply. It explains how these concepts influence business pricing strategies, using examples like Netflix and cigarette taxes. The chapter underscores the significance of understanding elasticity for consumers and firms, as price changes can significantly impact purchasing decisions and revenue across markets.
- 5.1: Price Elasticity of Demand and Price Elasticity of Supply
- This page explains how to calculate price elasticity of demand and supply, highlighting its classification into elastic, inelastic, or unitary categories based on the ratio of percentage changes in quantity and price. It introduces the Midpoint Method for consistent calculations. Additionally, it illustrates how elasticity varies along the demand curve, noting that demand can be elastic or inelastic depending on the specific price and quantity points assessed.
- 5.2: Polar Cases of Elasticity and Constant Elasticity
- This page discusses types of elasticity in economics: infinite elasticity (perfect elasticity), zero elasticity (perfect inelasticity), and constant unitary elasticity. Infinite elasticity means demand or supply changes infinitely with price changes, whereas zero elasticity indicates no change in quantity regardless of price. Constant unitary elasticity reflects a 1% change in price resulting in a 1% change in quantity.
- 5.3: Elasticity and Pricing
- This page highlights the influence of price elasticity on business strategies, detailing how firms adjust pricing in response to supply and demand changes. The relationship between inelastic demand and the ability to pass costs to consumers is illustrated, particularly in industries like agriculture and medical devices.
- 5.4: Elasticity in Areas Other Than Price
- This page explores elasticity concepts in economics, including income elasticity of demand, cross-price elasticity, and elasticities in labor and financial markets. It highlights income elasticity's role in distinguishing normal and inferior goods and discusses wage elasticity in labor supply. A case study on Netflix's 2011 price increase illustrates misjudged inelastic demand, leading to significant subscriber loss due to competition from substitutes.
- 5.5: Key Terms
- This page discusses elasticity in economics, highlighting concepts such as constant unitary elasticity, cross-price elasticity, elastic and inelastic demand, and infinite elasticity. It defines price elasticity of demand and supply, tax incidence, and wage elasticity of labor supply. Unitary elasticity shows proportional changes in demand or supply, while perfect inelasticity indicates that quantity remains unchanged despite price fluctuations.
- 5.6: Key Concepts and Summary
- This page explores price elasticity, a concept measuring how demand and supply react to price changes. It categorizes elasticity into elastic, unit elastic, and inelastic, with perfect elasticity indicating infinite responsiveness and zero elasticity showing no response. Demand and supply are typically inelastic in the short term but become more elastic over time. The incidence of taxes depends on elasticity, impacting who bears the burden.
- 5.7: Self-Check Questions
- This page offers exercises on calculating price elasticity of demand and supply in various scenarios, analyzing demand and supply curves with unitary elasticity, and discussing implications for companies. It covers the effects of costs and price changes on market behavior and revenue for a new drug. Additionally, it explores income elasticity related to bread consumption and the impact of cross-price elasticity on apple demand in response to orange price changes.
- 5.8: Review Questions
- This page explores key concepts of elasticity in economics, covering definitions of price elasticity of demand and supply, various elasticity types, and effects of demand and supply shifts on market equilibrium. It addresses comparative elasticity in different time frames, tax burden implications, and provides formulas for calculating diverse elasticities, including income, cross-price, wage elasticity of labor supply, and savings elasticity relative to interest rates.
- 5.9: Critical Thinking Questions
- This page explores economic concepts of price elasticity of demand and supply, highlighting differences in air travel classes, infinite short-term supply elasticity, and the role of supply in pricing necessities versus luxuries. It discusses toll pricing's impact on demand elasticity, excise taxes in inelastic supply scenarios, categorizes normal goods by income elasticity, and examines cross-price elasticity between left and right shoes.
- 5.10: Problems
- This page discusses economics problems involving price elasticity of demand and supply through various scenarios and equations, emphasizing real-world implications like the inelasticity of unique artworks and essential medical equipment. It explores how supply and demand dynamics influence employment and wages for low-skilled workers and suggests using diagrams and explanations to clarify these concepts.