Elasticity
Chapter Objectives
After you have read and studied this chapter, you should he able to describe the concept of elasticity and some specific elasticities; indicate the relationships between the incidence of various tax burdens and the price elasticities of supply and demand; compute elasticities from numerical observations; understand why marginal units are important for decision making; and explain the law of equal marginal advantage and its relevance for economic efficiency.
Chapter Review: Key Points.
The price-elasticity of demand is a measure of the responsiveness of the amount demanded to small price changes and is defined as the relative change in quantity demanded divided by the relative change in price:
ed = %∆Q / %∆P
Problems result when calculating elasticity if initial prices and quantities are used as bases, so economists typically use midpoint bases. The price-elasticity of demand is negative but, for convenience, we use absolute values to avoid the negative sign.
If price elasticity is less than one, then demand is relatively unresponsive to changes in price and is said to be inelastic. If elasticity is greater than one, demand is very responsive to price changes and is elastic. Demand is unitarily elastic if the elasticity coefficient equals one.
Elasticity, price changes, and total revenues (expenditures) are related in the following manner: If demand is inelastic (elastic) and price increases (falls), total revenue will rise. If demand is elastic (inelastic) and price rises (falls), total revenue (expenditures) will fall. If demand is unitarily elastic (ed = 1), total revenue will be unaffected by price changes.
The number and quality of substitutes, the proportion of the total budget spent, and the length of time considered are three important determinants of the elasticity of demand. Demand is more elastic the more substitutes are available, the more of the budget the item consumes, and the longer the time frame considered.
Along any negatively sloped linear demand curve, parts of the curve will be elastic, unitarily elastic, and inelastic. The price-elasticity of demand rises as the price rises.
Income-elasticity of demand is the proportional change in the amount of a good demanded divided by a given proportionate change in income. Normal goods have income-elasticities above zero, while inferior goods have negative income-elasticities.
Cross-elasticity of demand measures the responsiveness of the quantity demanded of one good to price changes in a related good. That is, price cross-elasticity is the proportional change in the quantity of good X (Chevrolets) divided by a given proportional change in the price of good Y (Fords). If the cross-elasticity of demand is positive (negative), the goods are substitutes (complements).
The price-elasticity of supply measures the responsiveness of suppliers to changes in prices, and is defined to parallel that for the price-elasticity of demand: the proportional change in the amount supplied divided by a given proportional change in price. The price-elasticity of supply is typically positive, reflecting the positive slope of the supply curve.
All economic elasticities tend to increase as the time interval considered becomes longer. Thus long run supplies and demands are more price elastic (and flatter) than short run supplies and demands.
Individual firms (sellers) often face perfectly elastic demands and individual consumers (buyers) often face perfectly elastic supplies for a product. Market demands and supplies, however, are almost never perfectly elastic.
The individual who actually loses purchasing power because of a tax is said to bear the tax’s economic incidence (tax burden). This may be quite different from the individual who is legally responsible for the tax, who bears its legal incidence. When these individuals differ, the tax has been shifted. A tax can be forward-shifted (to consumers) or backward-shifted (to labor or other resource owners).
If demand is perfectly inelastic or supply is perfectly elastic, a tax will be completely forward-shifted. If supply is perfectly inelastic or demand is perfectly elastic, the tax will be completely backward-shifted.
Vocabulary practice: switching.
Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.
Имеющийся в наличии по фиксированной цене; budget share; абсолютная величина; midpoint bases; кривая спроса отклоняющаяся вниз и влево; потребное количество; best single example; наличие товаров-заменителей; complementary goods; коэффициент эластичности; individual firms; неэластичный спрос; для удобства; forward-shifted tax; не подверженный влиянию ценовых изменений; backward-shifted tax; эластичность дохода; consume more of the budget; income-elasticity of demand; перекрёстная эластичность спроса; determinants of elasticities of demand; указывать на взаимоотношения между ч-то и ч-то; unitary price elasticity of demand; отдельно взятые потребители; compute\calculate elasticities; виды эластичности в экономике; inferior goods; исходные цены; economic incidence of taxation; эластичность; initial quantities; несущий ответственность по закону; relevance; товары-заместители; length of time considered; представленная в виде линии кривая спроса; proportionate change; marginal units; пересекать; item; закон равной предельного преимущества; юридическая сфера действия налогов; measure of the responsiveness; покупательная способность, платёжеспособный спрос; quantity demanded; относительный показатель пропорциональных изменений; numerical observations; абсолютно (не)эластичный спрос\предложение; связанные между собой переменные; positive slope of the supply curve; ценовая эластичность предложения и спроса; rectangular hyperbola; родственный товар; единично эластичный спрос; relatively unresponsive demand; normal goods; proportion of the total budget spent; касательная к кривой; suffer reduced purchasing power= испытать на себе сниженную покупательную способность; налоговое бремя, бремя налогового обложения; resource owners; активно реагировать; получающиеся в результате количественные изменения; specific elasticities; прямая, проходящая через начало координат; tend to increase; временные рамки; total revenue; единично (не)эластичный спрос\предложение.