key term - Elasticity Coefficient

Definition

The elasticity coefficient is a measure of the responsiveness of one economic variable, such as quantity demanded or quantity supplied, to changes in another variable, such as price. It is a crucial concept in understanding the dynamics of supply and demand in a market.

5 Must Know Facts For Your Next Test

1. The elasticity coefficient is a dimensionless number that ranges from 0 to infinity, with different values indicating different degrees of responsiveness.
2. An elasticity coefficient greater than 1 indicates that the dependent variable is elastic, meaning it is highly responsive to changes in the independent variable.
3. An elasticity coefficient less than 1 indicates that the dependent variable is inelastic, meaning it is not very responsive to changes in the independent variable.
4. The elasticity coefficient is a useful tool for businesses and policymakers to understand how changes in price, income, or other factors will affect the quantity demanded or supplied of a good or service.
5. The concept of elasticity is central to understanding the impact of government policies, such as taxes and subsidies, on the behavior of consumers and producers.

Review Questions

• Explain how the elasticity coefficient is calculated and what the different values of the coefficient indicate about the responsiveness of the dependent variable.
  • The elasticity coefficient is calculated as the percent change in the dependent variable (such as quantity demanded or quantity supplied) divided by the percent change in the independent variable (such as price). An elasticity coefficient greater than 1 indicates that the dependent variable is elastic, meaning it is highly responsive to changes in the independent variable. An elasticity coefficient less than 1 indicates that the dependent variable is inelastic, meaning it is not very responsive to changes in the independent variable. An elasticity coefficient of exactly 1 indicates that the dependent variable is unit elastic, meaning that a 1% change in the independent variable leads to a 1% change in the dependent variable.
• Describe how the concept of elasticity is used to understand the impact of government policies, such as taxes and subsidies, on the behavior of consumers and producers.
  • The concept of elasticity is central to understanding the impact of government policies on the behavior of consumers and producers. For example, if the demand for a good is inelastic, a tax on that good will primarily be borne by consumers, as they will continue to purchase the good despite the higher price. Conversely, if the demand for a good is elastic, a tax on that good will primarily be borne by producers, as consumers will be more responsive to the price increase and reduce their consumption. Similarly, a subsidy on a good with elastic supply will primarily benefit producers, as they will increase their production in response to the higher price, while a subsidy on a good with inelastic supply will primarily benefit consumers, as producers will not significantly increase their production.
• Analyze how the concept of elasticity can be used to inform business and pricing decisions, and discuss the potential implications of ignoring elasticity in these decisions.
  • The concept of elasticity can be used to inform business and pricing decisions by helping firms understand how changes in price will affect the quantity demanded of their products. If a firm is selling a product with elastic demand, it may be able to increase its total revenue by lowering the price, as the increase in quantity demanded will more than offset the decrease in price. Conversely, if a firm is selling a product with inelastic demand, it may be able to increase its total revenue by raising the price, as the decrease in quantity demanded will be relatively small. Ignoring elasticity in pricing decisions can lead to suboptimal outcomes, such as losing market share or failing to maximize profits. For example, a firm that raises prices on a product with elastic demand may experience a significant decrease in sales, leading to lower overall revenue. Alternatively, a firm that keeps prices low on a product with inelastic demand may be missing out on opportunities to increase its profitability.

Related terms

Price Elasticity of Demand:

The measure of the responsiveness of quantity demanded to changes in price, calculated as the percent change in quantity demanded divided by the percent change in price.

Price Elasticity of Supply:

The measure of the responsiveness of quantity supplied to changes in price, calculated as the percent change in quantity supplied divided by the percent change in price.

Constant Elasticity:

A situation where the elasticity coefficient remains the same regardless of the level of the independent variable, such as price or quantity.