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💵principles of macroeconomics review

key term - Elasticity Coefficient

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Definition

The elasticity coefficient is a measure of the responsiveness of one economic variable to changes in another related variable. It is a dimensionless ratio that quantifies the degree of change in one variable in response to a change in another variable, and is commonly used to analyze the sensitivity of demand and supply to changes in price.

5 Must Know Facts For Your Next Test

  1. The elasticity coefficient is a pure number, with no units, that ranges from zero to infinity.
  2. An elasticity coefficient greater than 1 indicates elastic demand or supply, where the quantity responds more than proportionately to price changes.
  3. An elasticity coefficient less than 1 indicates inelastic demand or supply, where the quantity responds less than proportionately to price changes.
  4. An elasticity coefficient of exactly 1 indicates unit elastic demand or supply, where the quantity responds proportionately to price changes.
  5. The sign of the elasticity coefficient indicates the direction of the relationship, with a negative sign for demand and a positive sign for supply.

Review Questions

  • Explain how the elasticity coefficient is used to analyze the sensitivity of demand to changes in price.
    • The price elasticity of demand, as measured by the elasticity coefficient, indicates how responsive the quantity demanded of a good or service is to changes in its price. An elasticity coefficient greater than 1 means demand is elastic, where a 1% change in price leads to a more than 1% change in quantity demanded. An elasticity coefficient less than 1 means demand is inelastic, where a 1% change in price leads to a less than 1% change in quantity demanded. This information is crucial for businesses to determine pricing strategies and understand consumer behavior.
  • Describe how the elasticity coefficient can be used to analyze the sensitivity of supply to changes in price.
    • The price elasticity of supply, as measured by the elasticity coefficient, indicates how responsive the quantity supplied of a good or service is to changes in its price. An elasticity coefficient greater than 1 means supply is elastic, where a 1% change in price leads to a more than 1% change in quantity supplied. An elasticity coefficient less than 1 means supply is inelastic, where a 1% change in price leads to a less than 1% change in quantity supplied. This information is important for producers to understand their ability to adjust production in response to price changes and for policymakers to assess the impact of policies on market outcomes.
  • Analyze how the sign and magnitude of the elasticity coefficient can be used to draw conclusions about the relationship between price and quantity demanded or supplied.
    • The sign of the elasticity coefficient indicates the direction of the relationship between price and quantity. A negative sign for the price elasticity of demand indicates an inverse relationship, where quantity demanded decreases as price increases. A positive sign for the price elasticity of supply indicates a direct relationship, where quantity supplied increases as price increases. The magnitude of the elasticity coefficient provides information about the responsiveness of quantity to price changes. An elasticity coefficient greater than 1 indicates elastic demand or supply, where quantity responds more than proportionately to price changes. An elasticity coefficient less than 1 indicates inelastic demand or supply, where quantity responds less than proportionately to price changes. This information is crucial for understanding consumer and producer behavior, as well as the potential impacts of policy interventions on market outcomes.

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