key term - Constant Elasticity

Definition

Constant elasticity refers to a situation where the elasticity of demand or supply remains the same regardless of the price level. This means that the percentage change in quantity demanded or supplied remains proportional to the percentage change in price, even as prices fluctuate.

5 Must Know Facts For Your Next Test

1. Constant elasticity implies that the demand or supply curve has a constant slope, meaning the percentage change in quantity is the same for any given percentage change in price.
2. The constant elasticity model is often used in economic analysis because it simplifies calculations and provides a good approximation of real-world demand and supply relationships.
3. Constant elasticity of demand can be represented by a power function, where the quantity demanded is proportional to price raised to the power of the elasticity coefficient.
4. Constant elasticity of supply can be represented by an exponential function, where the quantity supplied is proportional to price raised to the power of the elasticity coefficient.
5. The constant elasticity model is a useful tool for predicting the impact of price changes on quantity demanded or supplied, as well as for calculating the effect of taxes, subsidies, or other policy interventions.

Review Questions

• Explain how the concept of constant elasticity differs from the polar cases of elasticity.
  • The polar cases of elasticity refer to the two extreme situations where demand or supply is either perfectly elastic (infinite elasticity) or perfectly inelastic (zero elasticity). In contrast, constant elasticity describes a scenario where the elasticity remains the same regardless of the price level, meaning the percentage change in quantity is proportional to the percentage change in price. This is a more realistic representation of many real-world demand and supply relationships, as opposed to the polar cases which are theoretical benchmarks.
• Describe the mathematical functions used to represent constant elasticity of demand and supply.
  • Constant elasticity of demand can be represented by a power function, where the quantity demanded is proportional to price raised to the power of the elasticity coefficient. This means that the percentage change in quantity demanded is the same for any given percentage change in price. Constant elasticity of supply can be represented by an exponential function, where the quantity supplied is proportional to price raised to the power of the elasticity coefficient. These functional forms allow for straightforward calculations of the impact of price changes on quantity demanded or supplied.
• Evaluate the usefulness of the constant elasticity model in economic analysis and policy decision-making.
  • The constant elasticity model is a valuable tool in economic analysis because it simplifies calculations and provides a good approximation of real-world demand and supply relationships. By assuming a constant elasticity, economists can more easily predict the impact of price changes on quantity demanded or supplied, as well as the effects of taxes, subsidies, or other policy interventions. This makes the constant elasticity model a useful framework for evaluating the potential outcomes of economic policies and informing decision-making. However, it is important to recognize that the constant elasticity assumption may not always perfectly reflect the nuances of actual market behavior, and should be considered alongside other analytical approaches.

Related terms

Elasticity:

Elasticity measures the responsiveness of the quantity demanded or supplied to changes in price, income, or other factors.

Polar Cases of Elasticity: The two extreme cases of elasticity are perfectly elastic (infinite elasticity) and perfectly inelastic (zero elasticity).

Constant Elasticity of Demand: When the elasticity of demand remains the same regardless of the price level, it is known as constant elasticity of demand.