💸principles of economics review

key term - Inelastic

Definition

Inelastic refers to a situation where the demand or supply for a good or service is relatively unresponsive to changes in price. This means that the quantity demanded or supplied changes by a smaller proportion than the change in price.

5 Must Know Facts For Your Next Test

  1. Inelastic demand or supply is typically observed for goods or services that have few close substitutes, are considered necessities, or have a high addiction factor.
  2. The degree of inelasticity is measured by the elasticity coefficient, which is less than 1 for inelastic demand or supply.
  3. Inelastic demand or supply can have significant implications for the impact of taxes, subsidies, or other policies on the equilibrium price and quantity in a market.
  4. Factors that contribute to inelastic demand or supply include the availability of substitutes, the proportion of income spent on the good or service, and the time frame considered.
  5. Inelastic demand or supply is a key concept in the analysis of the polar cases of elasticity, as well as in the study of constant elasticity models.

Review Questions

  • Explain how the concept of inelastic demand or supply relates to the polar cases of elasticity.
    • The polar cases of elasticity, perfectly elastic and perfectly inelastic, represent the extremes of how responsive demand or supply is to changes in price. Inelastic demand or supply, where the quantity demanded or supplied changes by a smaller proportion than the change in price, falls between these two polar cases. Understanding inelastic demand or supply is crucial in analyzing the implications of policies and market conditions on equilibrium prices and quantities.
  • Describe how the degree of inelasticity can affect the impact of taxes or subsidies on a market.
    • The degree of inelasticity in a market can significantly influence the impact of taxes or subsidies on equilibrium prices and quantities. In the case of inelastic demand or supply, a tax or subsidy will result in a larger change in price relative to the change in quantity, as consumers or producers are less responsive to the price change. This can lead to a higher burden of the tax or subsidy being passed on to consumers or producers, respectively, depending on the relative elasticities of demand and supply.
  • Analyze how the concept of constant elasticity models relates to the idea of inelastic demand or supply.
    • Constant elasticity models, such as the constant elasticity of demand or supply functions, assume that the elasticity coefficient remains constant regardless of the price level. This means that the degree of responsiveness to price changes, whether inelastic, elastic, or unit elastic, is constant. Understanding the implications of inelastic demand or supply is crucial in the context of these models, as it allows for the analysis of how changes in factors like taxes, subsidies, or market conditions affect equilibrium prices and quantities when the elasticity is constant.

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