Learning Objectives
The language of elasticity can sometimes be confusing. We use the word elasticity to describe the property of responsiveness in economic variables. We also describe the responsiveness as (relatively) elastic or (relatively) inelastic. It gets worse. We can also describe elasticity as perfectly elastic or perfectly inelastic. How to we keep these different meanings understood? That is the purpose of this section. Show We mentioned previously that elasticity measurements are divided into three main ranges: elastic, inelastic, and unitary, corresponding to different parts of a linear demand curve. Demand is described as elastic when the computed elasticity is greater than 1, indicating a high responsiveness to changes in price. Computed elasticities that are less than 1 indicate low responsiveness to price changes and are described as inelastic demand. Unitary elasticities indicate proportional responsiveness of demand. In other words, the percent change in quantity demanded is equal to the percent change in price, so the elasticity equals 1. These ranges are summarized in Table 1, below.
It is important to note that both elastic and inelastic are relative terms, as shown in Figure 1, below. As one moves down the demand curve from top left to bottom right, the measured elasticity is much greater than one (very elastic), then just greater than one (somewhat elastic), then equal to one (unitary elastic, then less than one (somewhat inelastic), and finally much less than one (very inelastic). Note that the epsilon symbol, ε, is often used to represent elasticity.  Figure 1. Variations in Elasticity. As you saw earlier, price elasticity of demand ranges from more than 1 at high prices and less than 1 at low prices. Measured elasticities decreases as one moves down the demand curve from left to right. Polar Cases of ElasticityThere are also two extreme cases of elasticity: when computed elasticity equals zero and when it’s infinite. We will describe each case. A perfectly (or infinitely) elastic demand curve refers to the extreme case in which the quantity demanded (Qd) increases by an infinite amount in response to any decrease in price at all. Similarly, quantity demanded drops to zero for any increase in the price. A perfectly elastic demand curve is horizontal, as shown in Figure 2, below. While it’s difficult to think of real world example of infinite elasticity, it will be important when we study perfectly competitive markets. It’s a situation where consumers are extremely sensitive to changes in price. Say, for example, if the price of cruises to the Caribbean decreased, everyone would buy tickets (i.e., quantity demanded would increase to infinity), or when the price of cruises to the Caribbean increased, not a single person would be on the boat (i.e., quantity demanded would decrease to zero). Perfectly elastic demand is an “all or nothing” thing! Figure 2. Infinite Elasticity. This shows a perfectly elastic demand curve. The horizontal line shows that an infinite quantity will be demanded at a specific price. The quantity demanded is extremely responsive to price changes, moving from zero for prices close to P to infinite when prices reach P. While perfectly inelastic demand is an extreme case, necessities with no close substitutes are likely to have highly inelastic demand curves. This is the case with life-saving prescription drugs, for example. Consider a person with diabetes who needs insulin to stay alive. A specific quantity of insulin is prescribed to the patient. If the price of insulin decreases, the patient can’t stock up and save it for the future. If the price of insulin increases, the patient will continue to purchase the same quantity needed to stay alive. Perfectly inelastic demand means that quantity demanded remains the same when price increases or decreases. Consumers are completely unresponsive to changes in price. Figure 3. Zero Elasticity. A perfectly inelastic demand curve. The vertical line shows that at any price, the quantity demanded remains the same. The measured elasticity is zero. Final note: even though perfectly elastic and perfectly inelastic curves correspond to horizontal and vertical curves, remember that, in general, elasticity is not the same as the slope.
Watch this video to see graphed examples of perfectly inelastic, relatively inelastic, unit elastic, relatively elastic, and perfectly elastic demand.
These questions allow you to get as much practice as you need, as you can click the link at the top of the first question (“Try another version of these questions”) to get a new set of questions. Practice until you feel comfortable doing the questions.
perfectly (or infinitely) elastic: the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance perfectly inelastic: the highly inelastic case of demand in which a percentage change in price, no matter how large, results in zero change in the quantity; thus, the price elasticity of demand is zero; vertical in appearance (relatively) elastic: the percentage change in quantity demanded is greater than the percentage change in price; measured price elasticity of demand is greater than one (in absolute value) (relatively) inelastic: the percentage change in quantity demanded is less than the percentage change in price; measure price elasticity of demand is less than one (in absolute value) unitary elastic: when a given percent price change in price leads to an equal percentage change in quantity demanded Contribute!Did you have an idea for improving this content? We’d love your input. Improve this pageLearn More From WikiEducator The price elasticity of demand (PED) measures the change in demand for a good in response to a change in price.
Objectives
Key points
Termsinelastic Demand for a good is inelastic when a change in price has a relatively small effect on the quantity of the good demanded. elastic Demand for a good is elastic when a change in price has a relatively large effect on the quantity of the good demanded. Unit Elastic Demand for a good is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price. Price elasticityThe price elasticity of demand (PED) is a measure that captures the responsiveness of a good's quantity demanded to a change in its price. More specifically, it is the percentage change in quantity demanded in response to a one percent change in price when all other determinants of demand are held constant. The formula for the coefficient of PED is: PED = % change in quantity demanded / % change in price The law of demand states that there is an inverse relationship between price and demand for a good. As a result, the PED coefficient is almost always negative. However, economists tend to ignore the sign in everyday use. Only goods that do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. The numerical values for the PED coefficient could range from zero to infinity. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a less than proportional effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one. In this case, changes in price have a more than proportional effect on the quantity of a good demanded. A PED coefficient equal to one indicates demand that is unit elastic; any change in price leads to an exactly proportional change in demand (i.e. a 1% reduction in demand would lead to a 1% reduction in price). A PED coefficient equal to zero indicates perfectly inelastic demand. This means that demand for a good does not change in response to price. Perfectly inelastic demandWhen demand is perfectly inelastic, quantity demanded for a good does not change in response to a change in price. Perfectly elastic demandFinally, demand is said to be perfectly elastic when the PED coefficient is equal to infinity. When demand is perfectly elastic, buyers will only buy at one price and no other. When the demand for a good is perfectly elastic, any increase in the price will cause the demand to drop to zero.
|
When the absolute value of the price elasticity of demand is equal to we say that demand is unit elastic?
Postagens relacionadas
direito autoral © 2024 cemle Inc.
