key term - Short-Run Elasticity

Definition

Short-run elasticity refers to the responsiveness of quantity demanded or supplied to changes in price or other factors over a short period of time, where the production capacity or input factors are fixed. It is a crucial concept in understanding the polar cases of elasticity and its impact on pricing strategies.

5 Must Know Facts For Your Next Test

1. Short-run elasticity is typically less elastic (more inelastic) than long-run elasticity, as producers have limited ability to adjust production capacity in the short-run.
2. The short-run elasticity of demand is often more inelastic than the short-run elasticity of supply, as consumers have fewer substitution options in the short-run.
3. The concept of short-run elasticity is crucial in understanding the polar cases of elasticity, such as perfectly elastic and perfectly inelastic demand or supply.
4. Constant elasticity, where the elasticity remains the same regardless of price or quantity, is an important assumption in economic models and pricing strategies.
5. Short-run elasticity has significant implications for pricing decisions, as firms can leverage inelastic demand or supply to increase profits in the short-run.

Review Questions

• Explain how short-run elasticity differs from long-run elasticity and why this distinction is important in the context of pricing strategies.
  • Short-run elasticity refers to the responsiveness of quantity demanded or supplied to changes in price or other factors over a short period of time, where production capacity or input factors are fixed. In contrast, long-run elasticity considers the responsiveness over a longer period, where producers can adjust their production capacity. Short-run elasticity is typically less elastic (more inelastic) than long-run elasticity, as producers have limited ability to adjust in the short-run. This distinction is crucial for pricing strategies, as firms can leverage inelastic short-run demand or supply to increase profits in the short-run, while long-run elasticity may require different pricing approaches to maintain market share and competitiveness.
• Analyze the relationship between short-run elasticity and the polar cases of elasticity, such as perfectly elastic and perfectly inelastic demand or supply.
  • The concept of short-run elasticity is closely tied to the polar cases of elasticity, which are the extremes of the elasticity spectrum. Perfectly elastic demand or supply, where quantity demanded or supplied changes infinitely in response to a small price change, is an example of a highly elastic short-run scenario. Conversely, perfectly inelastic demand or supply, where quantity demanded or supplied does not change at all in response to a price change, represents a highly inelastic short-run situation. Understanding short-run elasticity is crucial in identifying and analyzing these polar cases, as they have significant implications for pricing, production, and market dynamics in the short-run.
• Evaluate the importance of the assumption of constant elasticity in economic models and pricing strategies, and how it relates to the concept of short-run elasticity.
  • The assumption of constant elasticity, where the elasticity of demand or supply remains the same regardless of price or quantity, is an important concept in economic models and pricing strategies. This assumption is closely tied to the idea of short-run elasticity, as it suggests that the responsiveness of quantity to changes in price or other factors does not vary over the short-run. The assumption of constant elasticity simplifies economic analysis and allows for the development of pricing models that can be effectively applied in the short-run. However, in reality, elasticity may not always be constant, and firms must consider the potential changes in short-run elasticity when making pricing decisions to maximize profits and maintain market competitiveness.

Related terms

Elasticity:

The measure of the responsiveness of quantity demanded or supplied to changes in price or other factors.

Long-Run Elasticity:

The responsiveness of quantity demanded or supplied to changes in price or other factors over a long period of time, where production capacity or input factors can be adjusted.

Constant Elasticity:

A situation where the elasticity of demand or supply remains constant regardless of the price or quantity level.