Elasticity Coefficient

Definition

The elasticity coefficient is a measure of the responsiveness of one economic variable to changes in another variable. It is a dimensionless ratio that quantifies the degree of sensitivity between two related variables, such as the quantity demanded and the price of a good.

5 Must Know Facts For Your Next Test

1. The elasticity coefficient is calculated as the percent change in the dependent variable divided by the percent change in the independent variable.
2. Elasticity coefficients can be positive or negative, depending on the relationship between the variables.
3. Elasticity coefficients greater than 1 indicate elastic demand or supply, while coefficients less than 1 indicate inelastic demand or supply.
4. Elasticity coefficients near 0 indicate that the dependent variable is unresponsive to changes in the independent variable.
5. The concept of elasticity is crucial for understanding consumer and producer behavior, as well as the impact of policy changes on market outcomes.

Review Questions

• Explain the concept of the elasticity coefficient and how it is used to measure the responsiveness of economic variables.
  • The elasticity coefficient is a dimensionless ratio that measures the responsiveness of one economic variable, such as quantity demanded, to changes in another variable, such as price. It is calculated as the percent change in the dependent variable divided by the percent change in the independent variable. Elasticity coefficients greater than 1 indicate elastic relationships, where the dependent variable is highly responsive to changes in the independent variable. Coefficients less than 1 indicate inelastic relationships, where the dependent variable is less responsive to changes. The elasticity coefficient is a crucial concept for understanding consumer and producer behavior, as well as the impact of policy changes on market outcomes.
• Describe the characteristics of the polar cases of elasticity and how they relate to the elasticity coefficient.
  • The polar cases of elasticity refer to the extreme scenarios where the elasticity coefficient takes on specific values. In the case of perfectly elastic demand or supply, the elasticity coefficient is equal to infinity, indicating that the dependent variable is infinitely responsive to changes in the independent variable. Conversely, in the case of perfectly inelastic demand or supply, the elasticity coefficient is equal to zero, indicating that the dependent variable is completely unresponsive to changes in the independent variable. These polar cases represent the boundaries of the elasticity spectrum and have important implications for understanding market dynamics and the impact of policy changes.
• Analyze the concept of constant elasticity and explain how it relates to the elasticity coefficient.
  • Constant elasticity refers to a situation where the elasticity coefficient remains the same regardless of the level of the independent variable. This means that the percent change in the dependent variable is proportional to the percent change in the independent variable, and this relationship holds true across different levels of the independent variable. Constant elasticity is an important concept in economic analysis because it simplifies the modeling of demand and supply functions, allowing for more straightforward predictions of market outcomes. The elasticity coefficient is a key component of constant elasticity, as it captures the consistent responsiveness between the dependent and independent variables, regardless of their absolute levels.

Related terms

Demand Elasticity: Demand elasticity measures the responsiveness of the quantity demanded of a good or service to changes in its price, income, or other factors.

Supply Elasticity: Supply elasticity measures the responsiveness of the quantity supplied of a good or service to changes in its price or other factors.

Constant Elasticity:

Constant elasticity refers to a situation where the elasticity coefficient remains the same regardless of the level of the independent variable.