Elastic refers to the responsiveness or sensitivity of one economic variable, such as quantity demanded or quantity supplied, to changes in another economic variable, such as price. It is a measure of how much one variable changes in response to changes in another variable.
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Elastic demand or supply means that the quantity demanded or supplied changes by a larger percentage than the change in price.
The price elasticity of demand or supply is calculated as the percentage change in quantity divided by the percentage change in price.
Elastic demand or supply implies that consumers or producers are highly responsive to price changes, while inelastic demand or supply means they are less responsive.
Factors that affect the elasticity of demand or supply include the availability of substitutes, the time period considered, and the proportion of a consumer's budget spent on the good.
The concept of elasticity is crucial for understanding how markets respond to changes in prices and how producers and consumers make decisions.
Review Questions
Explain the relationship between the price elasticity of demand and the responsiveness of quantity demanded to changes in price.
The price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price. When demand is elastic, a change in price will result in a larger percentage change in the quantity demanded. This means consumers are highly responsive to price changes and will adjust their consumption accordingly. Conversely, when demand is inelastic, a change in price will result in a smaller percentage change in the quantity demanded, indicating that consumers are less responsive to price changes.
Describe how the time period considered affects the price elasticity of supply.
The price elasticity of supply is influenced by the time period under consideration. In the short run, supply is typically more inelastic, meaning that producers are less responsive to changes in price. This is because in the short run, producers have limited ability to adjust their production levels, such as changing the quantity of inputs or expanding their production capacity. However, in the long run, supply becomes more elastic as producers have more flexibility to adjust their production in response to price changes, such as investing in new equipment or expanding their facilities.
Analyze how the availability of substitutes affects the price elasticity of demand for a good.
The availability of substitutes is a key factor that determines the price elasticity of demand for a good. If a good has many close substitutes, its demand will be more elastic, meaning that a change in price will result in a larger percentage change in the quantity demanded. This is because consumers have the option to switch to alternative products when the price of the original good increases. Conversely, if a good has few or no close substitutes, its demand will be more inelastic, as consumers have limited options to substitute the good and are less responsive to price changes.