Questions tagged [elasticity]
Elasticity is the measurement of how responsive an economic variable is to a change in another.
318 questions
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How quickly does the chicken market move to equilibrium?
In Poland, people protest against the plan to build a chicken farm next to their homes and succeed in stopping it. Let’s say the farm would’ve produced 10,000 tonnes of chicken per year. How much less ...
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Point estimate or rate of change for price elasticity using observational data
Coming from a different background, I can't quite get my head around around estimation of price elasticity from observational data.
It seems that most of the materials online suggest using a log-log ...
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Why is price gouging better than emergency rationing for essential goods and services during disasters?
A recent opinion piece in the Wall Street defended 'price gouging'- charging excessively high prices for essential goods in a disaster zone.
In this video, the example used is of a hurricane hitting a ...
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Why do economists deliberately conflate willingness and ability to pay in the context of price signals and price gouging?
Economists tend to disagree with price gouging legislation, because they agree with price gouging and posit that it ensures the most "efficient" distribution of resources during a crisis.
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Elasticity of demand calculation yields unit elasticity at $0. What's wrong?
I was trying to solve $E_D=\dfrac{dQ}{dP}\cdot\dfrac{P}{Q}=-1$, assuming $Q\neq0$.
$$
\begin{align*}
P\ dQ&=-Q\ dP\\
\int P\ dQ&=-\int Q\ dP\\
\end{align*}
$$
Integration by parts yields:
$$
\...
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Comparative Statics - Capital Augmenting Technological Change
I am reading the article by Acemoglu and Restrepo (AEA Papers and Proceedings, 2018) and have encountered some difficulties deriving equation (1). I hope you can help me work through it.
The aggregate ...
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Set the price to maximize profits
Suppose there's a patented and perishable product that all people will need sometime in their lives which they would rationally give all the resources they could access to purchase. How would a seller ...
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Implications of assuming quadratic utility; the search for an alternative
In this answer, I was pointed to the utility function
$$
U(c, y) = c - \frac{c^2}{2} + y
$$
with corresponding demand function
$$
c(p) = 1 -p
$$
which is inelastic for $p < 1/2$. Something that ...
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Log-Log Regression versus Delta-Delta Regression
I am trying to estimate the self- and cross-price elasticities of demand for Alaska (AS) and Southwest (WN) on a given route. I have price in quantity data that varies over time.
Which of the ...
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Why is land considered fixed if the supply of land for a particular use is not fixed?
There is a very strong consensus that the supply of land is fixed or perfectly inelastic. However, I found this article by Wyatt (1994) that contests this view:
To begin with, the conventional wisdom ...
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Modified Elasticity Calculation
I have 5 yrs worth of price and unit sold data for retail products. Generally these products have MRP and sold at some discount. I want to create elasticity curve for these products. However over a ...
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Ideal timeframe to consider for elasticity curve
I have transaction data for luxury retail domain. It is roughly 5 years of transaction data which provides week / month level details in terms of number of units being sold at a given price point. I ...
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Assuming a fall in price, does consumer surplus fall more with elastic or inelastic price elasticity of demand
I know that the total consumer surplus is higher for more inelastic P.E.D values, which makes intuitive sense: People would be willing to pay more than they actually do for inelastic goods e.g. a ...
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What kind of data should I use for estimating price elasticity of demand?
I’m planning to use the log-log model to estimate price elasticity of demand
$$\ln(Q) = \beta_0 +\beta_1\ln(P) $$
I’m already aware of its drawbacks and that there are other estimation methods, but I ...
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How do you calculate price elasticity of aggregate demand?
Price elasticity of demand is defined as $\frac{\delta q}{q}\frac{p}{\delta p}$. If aggregate demand $q = q_1 + \ldots + q_n$, then $\delta q = \delta q_1 + \ldots + \delta q_n$, and the price ...
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Modeling Approach to Adjust linear Elasticity Effect in Pricing Optimization
I am working on a pricing optimization model for a product where the price depends on the competition as well as our costs. The current formulation of the model is:
...
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Is cross-price elasticity a Cobb-Douglas production function?
This may seem like a silly question... Well... I guess, because it really is... But I have just realized that the intuition behind both principles may not be mutually exclusive.
Consider we would like ...
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Utility functions that exhibit nonconstant elasticity of marginal utility
Consider there is a single good in the economy. The class of utility functions for which the elasticity of marginal utility $\eta$ is constant is given by
$$U(C)=\frac{C^{1-\eta}}{1-\eta}$$
for $\eta&...
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elasticity of labor supply
Labor supply is
$ L(s,H) = \frac{f(\theta)}{s + f(\theta)} H $
Now the elasticity wrt to tightness $\theta$ is supposed to be
$\epsilon_L= \epsilon_f - \frac{f(\theta)}{s + f(\theta)} \epsilon_f$
...
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Significance of simultaneity BIAS in local retail shop belonging to a big retail chain
This question follows from the previous question on multiplicative BIAS in cross-price elasticity, but I think it deserves its own space.
I have scanner data from a small store branch belonging to a ...
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Incorporate fixed effect in pricing decisions with linear models
I have the following model the predict the log of volume: fixed_effect + day_of_week_effect + elasticity*(Price - competitor_price).
I want to formulate an optimization problem that maximize my profit ...
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Why does the price of firewood from Ardennes forests rise when the price of natural gas from the North Sea rises?
I have an exam question from last year that I don't understand. I have to explain this : why does the price of firewood from Ardennes forests rise when the price of natural gas from the North Sea ...
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Elasticity of job-finding rate
The job-finding rate is
$ f(\theta) = \omega \theta^{1-\eta} $
Then the elasticity wrt to tightness is
$\epsilon= \frac{d f}{d \theta} \frac{\theta}{f} = \frac{d ln(f)}{d ln(\theta)} = \frac{d ln(\...
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Example of a utility function which yields inelastic demand function
I am looking for a example of a utility function which, when the utility maximisation problem is solved, results in an inelastic demand. The standard examples in textbooks always seem to have unitary ...
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Deriving the tax incidence formula -- what am I doing wrong?
I'm trying to derive the tax incidence for an excise $t$ so that producers receive $p$ and consumers pay $q=p+t$ per unit. The formula I am seeing everywhere is some version of
$$
\frac{\mathrm{d}p}{\...
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Definition of semi-elasticity
The "$x$-elasticity of $y$" is defined as $\epsilon = \dfrac{\partial y/y}{\partial x/x}$.
The $x$ goes down, and the $y$ goes up.
But we have two definitions of semi-elasticity:
$\epsilon_1 ...
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Calculation of simple elasticity problem
I'm reading Advanced Macroeconomics by Romer and having trouble to understand very simple calculation provided in just one sentence.
Define real money market equilibrium condition as $(\frac{M}{P})^s=...
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MCQ on income and substitution effects
Person A spends their income only on bread and cheese. Given a rise in the price of bread leaving income constant and the price of cheese constant, the consumer consumes less bread and less cheese. ...
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the income elasticity at the mean values
What is the formula of the income elasticity at the mean values?
I have two variables, I is income and C is consumption. And I have 10 observations (sample size)
Regresison equation
$$C = a + bI $$
...
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why is increasing price not more profitable when the demand is unitary elastic?
according to the theory (if p-p1=q-q1), the total revenue remains the same because the demand decreases by the same percentage price does. If this is the elasticity of a product, the company ...
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Price elasticity of demand when total expenditure is constant
I was recently given the following question: assuming that a consumer's total expenditure for a good does not change when the price of that good declines, what is the price elasticity of that consumer'...
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Is the supply and demand elasticity equal at the equilibrium?
I am working through homeowrk problems and we were asked to calculate the supply and demand at the equilibruim using either the point or arc method. I chose to use the point method and will provide a ...
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Inequality and effect on pricing
Suppose there’s an island that for whatever reason has a finite amount of US Dollars; 1000 residents live on the island and use this fixed amount of currency to exchange goods and services.
Suddenly, ...
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What point am I calculating the PED (Price Elasticity of demand)
I'm at a very basic level of economics (highschool), so what I write may not be very coherent, i'm just a bit confused and I can't get any book or source to awnser the question I have.
See, the ...
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Elasticity computations and revenue
I would have appreciated some help in this issue. I have a demand schedule that looks like this
...
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Price elasticity of demand coefficient
I am working on the following question:
AS price increases along a straight line demand curve, will the price elasticity of demand coefficient increase, decrease or remain unchanged?
The answer states ...
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Elasticity computation
Suppose that we have the following regression:
$$ln (h) = e_{0} + e_{1} ln (w) + u$$.
Isn't elasticity $e_{1}$? in other words: $\frac{\delta ln (h)}{\delta ln (w)}$? I am a bit confused since I have ...
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Why don't producers of goods with inelastic demand refuse to increase supply?
I'm reading Paul Samuelson's Economics (19th edition, 2009). In page 71, the Paradox of the Bumper Harvest is introduced. According to the paradox, an increase in food supply from a good harvest ...
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Is the price elasticity of a product equal to the sum of all cross-price elasticities of demand for that product? Why?
I encountered the claim stated in the title, without it being further substantiated. I'm looking for some elaboration on it, assuming it's true. Also on an intuitive level.
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Why is the demand curve inelastic for essential items?
Elasticity refers to the percent change in quantity with respect to the percent change in price.
Elastic means that the percent change in quantity is greater than the percent change in price.
...
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Price Elasticiyt of Demand & (AR - MR)
I have the following question:
Using this equation: $MR = P(1+\frac{1}{ε})$ and the attached graph. How does the vertical distance between the demand curve and MR curve at a given level of output ...
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Different methods to calculate price elasticity
I was testing different methods to calculate price elasticities in simple theoretical scenarios and I encountered a seemingly discrepancy between two very popular methodologies.
Methodology 1: use the ...
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Elasticity of substitution between capital and effective labour
While going through the derivation of elasticity of substitution between capital and effective labour in economic materials for a Slow growth model, I found the following step there:
$\frac{\partial ...
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Different elasticities of substitution
I have been reading into generalizations of the concept of elasticity of substitution for more goods/inputs and three main possibilities emerged:
Hicksian EOS
Allen-Uzawa EOS
Morishima EOS
HICKS
As ...
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Which utility functions generate constant (but arbitrary) price/income elasticity of demand functions?
I want to estimate a demand function, and for convenience, I would suppose it has constant price and income elasticities: $\varepsilon$ and $\eta$, let's say. That is, demand $x_i(p, w)$ would be ...
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Optimised Pricing with Static Price Data
If you have price data going back several years, but the price is constant, is there any way to work out the elasticity of demand (or dynamically optimise prices another way).
The sales volume is in ...
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Truth behind Samuelson's statement against elasticities
I found the following statement by Paul Samuelson:
Through the influence of Alfred Marshall economists have developed a fondness for certain dimensionless expressions called elasticity coefficients. ...
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Price Elasticity with real monthly data
Is it possible to calculate the Price elasticity based on the following set of data?
I tried with the formulas widely available, but looks like the results are not correct.
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How to determine elasticity of demand when equation has more than one variable
How should one go about determining the own price elasticity of demand of the following:
Assume that the market demand for barley is given by: Q=1,900−4PB+0.1M+2PW
, where Q
is the quantity of barley ...
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why is diamond an inelastic good?
I understand that since diamonds are valued as rare, high-value items in society, even when the price for them increases, the quantity demanded remains the same. That is, people are willing to pay ...
