🛒principles of microeconomics review
5.2 Polar Cases of Elasticity and Constant Elasticity
Last Updated on June 24, 2024
Elasticity measures how sensitive consumers are to price changes. It ranges from infinite (perfectly elastic) to zero (perfectly inelastic). Understanding these extremes helps grasp real-world demand patterns and how businesses set prices.
Different elasticity types affect how price changes impact quantity demanded and total revenue. Elastic demand means price changes significantly affect quantity, while inelastic demand shows little response. This knowledge is crucial for pricing strategies and market analysis.
Polar Cases and Constant Elasticity
Infinite vs zero elasticity
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- Infinite elasticity (perfectly elastic demand)
- Quantity demanded changes by an infinite amount in response to any change in price even a tiny price increase causes quantity demanded to drop to zero
- Demand curve is a horizontal line parallel to the x-axis (quantity)
- Examples:
- Commodity products with many perfect substitutes (wheat, oil, gold)
- Consumers are highly sensitive to price changes will immediately switch to a substitute if the price increases even slightly
- Zero elasticity (perfectly inelastic demand)
- Quantity demanded does not change at all in response to changes in price consumers will purchase the same quantity regardless of price
- Demand curve is a vertical line perpendicular to the x-axis (quantity)
- Examples:
- Essential goods with no close substitutes (life-saving medications, water, electricity)
- Consumers are not sensitive to price changes will continue to purchase the same quantity even if the price increases significantly
Interpreting elasticity graphs
- Constant unitary elasticity
- Elasticity is equal to -1 at every point on the demand curve a 1% change in price always leads to a 1% change in quantity demanded in the opposite direction
- Demand curve is a rectangular hyperbola has a constant elasticity of -1 at every point
- Total revenue (price × quantity) remains constant when price changes an increase in price is exactly offset by a decrease in quantity demanded
- This is also known as unit elastic demand
- Infinite elasticity
- Demand curve is a horizontal line parallel to the x-axis (quantity)
- Any change in price results in an infinite change in quantity demanded even a tiny price increase causes quantity demanded to drop to zero
- Zero elasticity
- Demand curve is a vertical line perpendicular to the x-axis (quantity)
- Changes in price do not affect the quantity demanded consumers will purchase the same quantity regardless of price
Price changes across elasticity types
- Infinite elasticity
- Any price increase leads to a decrease in quantity demanded to zero consumers will immediately switch to a substitute
- Any price decrease leads to an infinite increase in quantity demanded consumers will purchase an unlimited amount at the lower price
- Zero elasticity
- Changes in price have no effect on the quantity demanded consumers will continue to purchase the same quantity even if the price changes significantly
- Quantity demanded remains constant regardless of price changes the demand curve is a vertical line
- Unitary elasticity
- Percentage change in quantity demanded is equal to the percentage change in price a 1% increase in price leads to a 1% decrease in quantity demanded
- An increase in price leads to an equal percentage decrease in quantity demanded total revenue remains constant
- A decrease in price leads to an equal percentage increase in quantity demanded total revenue remains constant
- Elastic demand
- Percentage change in quantity demanded is greater than the percentage change in price (beef, luxury goods)
- An increase in price leads to a larger percentage decrease in quantity demanded total revenue decreases
- A decrease in price leads to a larger percentage increase in quantity demanded total revenue increases
- Inelastic demand
- Percentage change in quantity demanded is smaller than the percentage change in price (gasoline, cigarettes)
- An increase in price leads to a smaller percentage decrease in quantity demanded total revenue increases
- A decrease in price leads to a smaller percentage increase in quantity demanded total revenue decreases
Additional Elasticity Concepts
- Elasticity coefficient: A numerical measure of the responsiveness of quantity demanded to changes in price, income, or other factors
- Cross-price elasticity: Measures how the quantity demanded of one good responds to a change in the price of another good
- Income elasticity: Measures how the quantity demanded of a good changes in response to a change in consumer income
- Short-run elasticity: Refers to the immediate response of quantity demanded to price changes, often more inelastic due to limited alternatives
- Long-run elasticity: Reflects the full adjustment of quantity demanded to price changes over time, typically more elastic as consumers have more time to find substitutes
Key Terms to Review (29)
Quantity Demanded: Quantity demanded refers to the amount of a good or service that consumers are willing and able to purchase at a given price during a specific time period. It is a fundamental concept in microeconomics that describes the relationship between the price of a product and the amount of that product that consumers will buy.
Quantity Supplied: Quantity supplied refers to the amount of a good or service that producers are willing and able to sell at a given price during a specific time period. It is a central concept in the theory of supply and demand, which explains how market equilibrium is determined.
Price Elasticity of Demand: Price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price. It quantifies how much the quantity demanded changes when the price changes, providing insights into consumer behavior and the dynamics of supply and demand in a market.
Constant Elasticity: 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.
Price: Price is the amount of money charged for a good or service. It represents the value that a buyer is willing to pay in exchange for what the seller is offering. Price is a fundamental concept in economics that is closely tied to the laws of supply and demand, as well as the concepts of elasticity and constant elasticity.
Elastic Demand: Elastic demand refers to a situation where the quantity demanded of a good or service is highly responsive to changes in its price. When demand is elastic, a small change in price leads to a relatively large change in the quantity demanded.
Income Elasticity: Income elasticity is a measure of the responsiveness of the quantity demanded of a good or service to a change in the consumer's income. It quantifies the degree to which demand for a product changes when the consumer's income changes, while holding all other factors constant.
Commodity Products: Commodity products are homogeneous, interchangeable goods that are produced by multiple suppliers and sold based on price rather than brand or other differentiating factors. They are typically raw materials or basic agricultural products that have little to no product differentiation, making them suitable for the concepts of Polar Cases of Elasticity and Constant Elasticity.
Constant Unitary Elasticity: Constant unitary elasticity refers to a situation where the elasticity of demand or supply for a good remains constant and equal to 1 regardless of the price level. This means that a 1% change in price will result in a 1% change in quantity demanded or supplied, maintaining a unit elastic relationship between price and quantity.
Rectangular Hyperbola: A rectangular hyperbola is a specific type of hyperbola where the product of the coordinates of any point on the curve is a constant. This unique property makes the rectangular hyperbola an important concept in the study of elasticity, particularly in the context of polar cases of elasticity and constant elasticity.
Alfred Marshall: Alfred Marshall was a renowned British economist who is considered one of the most influential figures in the development of modern economic theory. His contributions were particularly significant in the areas of price elasticity of demand, price elasticity of supply, and the concept of elasticity in general.
Giffen Goods: Giffen goods are a type of inferior good where the demand for the good increases as the price of the good increases, contradicting the typical law of demand. This phenomenon is observed in certain subsistence economies where the good is a staple food item that makes up a large portion of the consumer's budget.
Perfectly Elastic Demand: Perfectly elastic demand refers to a situation where the quantity demanded of a good or service is infinitely responsive to changes in price. In other words, even the slightest change in price will result in a complete shift in the quantity demanded, with consumers being willing to buy an unlimited amount at the new price.
Luxury Goods: Luxury goods are products or services that are not considered essential and are often perceived as desirable or prestigious. These items are typically more expensive than their functional counterparts and are purchased for their aesthetic, emotional, or social value rather than just their utilitarian purpose.
Essential Goods: Essential goods are products or services that are considered necessary for basic human survival and well-being. These goods are typically inelastic in demand, meaning that consumers will continue to purchase them regardless of changes in price, as they are deemed essential for daily life.
Inelastic Demand: Inelastic demand refers to a situation where the quantity demanded of a good or service changes by a smaller percentage than the change in its price. In other words, consumers are relatively insensitive to price changes for that particular product or service.
Horizontal Demand Curve: A horizontal demand curve is a type of demand curve that is perfectly elastic, meaning the quantity demanded is highly responsive to even the smallest change in price. This indicates that consumers are extremely sensitive to price changes for the product, and they will buy a large quantity at the prevailing market price but none at all if the price rises even slightly.
Polar Cases: Polar cases refer to the extreme or limiting situations in the context of elasticity, where the responsiveness of one variable to changes in another variable is at its maximum or minimum. These cases provide insights into the behavior of economic variables under different conditions.
Total Revenue: Total revenue is the total amount of money a firm receives from the sale of its products or services. It is the product of the quantity sold and the price per unit, and is a crucial factor in a firm's profitability and decision-making processes.
Elasticity Coefficient: 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.
Vertical Demand Curve: A vertical demand curve is a type of demand curve that is perfectly inelastic, meaning that the quantity demanded does not change in response to changes in price. This indicates that the good or service has no close substitutes, and consumers will purchase the same quantity regardless of the price.
Cross-Price Elasticity: Cross-price elasticity is a measure of how the quantity demanded of one good changes in response to a change in the price of another good. It reflects the degree of substitutability or complementarity between two products, and is an important concept in understanding consumer behavior and market dynamics.
Unit Elastic Demand: Unit elastic demand refers to a situation where the percentage change in quantity demanded is exactly equal to the percentage change in price. In other words, the demand elasticity is equal to 1, indicating that consumers are just as responsive to changes in price as they are to changes in quantity.
Necessities: Necessities are goods and services that are essential for an individual's or household's basic survival and well-being. These are the most fundamental and indispensable items required to maintain a minimum standard of living, such as food, water, shelter, and healthcare.
Infinite Elasticity: Infinite elasticity refers to a situation where the quantity demanded of a good or service is perfectly responsive to even the smallest change in price. In this case, the demand curve is perfectly horizontal, indicating that consumers will buy any quantity at the prevailing market price.
Long-Run Elasticity: Long-run elasticity refers to the responsiveness of demand or supply to changes in price over an extended period, where all factors of production can be adjusted. It represents the degree to which consumers or producers can alter their behavior in the long term in response to price fluctuations.
Zero Elasticity: Zero elasticity, also known as perfectly inelastic demand or supply, refers to a situation where the quantity demanded or supplied is completely unresponsive to changes in price. In other words, the quantity does not change at all regardless of how the price fluctuates.
Short-Run Elasticity: 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.
Perfectly Inelastic Demand: Perfectly inelastic demand refers to a scenario where the quantity demanded of a good or service does not change at all in response to changes in its price. Regardless of the price, the quantity demanded remains fixed, exhibiting zero price elasticity of demand.