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Questions tagged [elasticity]

Elasticity is the measurement of how responsive an economic variable is to a change in another.

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Price elasticity when relationship between sales, price and other factors is not linear

For commercial deployment, price elasticity is calculated through linear regression which assumes that there is a linear relationship between price and sales. I have a)price and b)social media ratings ...
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Elasticity of demand equals -1 but income decreases!

In my textbook, it's stated that: When $\epsilon < -1$, demand is elastic and raising price will result in smaller income, while lowering price will result in bigger income. When $\epsilon =...
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If the Engel Curve of a Cobb-Douglas utility function is positive and linear, than does that mean it is neither a necessity nor a luxury good?

Since the concavity of the Engel Curve determines whether it is a necessity or luxury (i.e. how fast quantity demand changes in relation to changes in income), and since the second derivative of a ...
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How would you calculate the Price Elasticity of Demand if the Prices are constant, given that there is change in quantity demanded?

I have data that I have collected suggests that the prices are more or less constant throughout the month whereas the quantity demanded changes on a day to day basis. Recalling the formula for PED, we ...
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Elasticity of substitution in Jehle and Reny Advanced Micro (3rd ed) exercise 3.8

Letting $f_i(\mathbf{x})=\partial f(\mathbf{x})/\partial x_i$, ($\mathbf{x}$ is a vector, a commodity bundle, and $x_i$ is a scalar, commodity $i$ in the bundle) show that, $\sigma_{ij}(\mathbf{x})\...
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Electricity as inelastic good

Could be electricity considered as an inelastic good? I am interested in the electricity delivered to final consumers in member countries of Nordpool Spot (Norway, Sweden, Finland, Denmark, Estonia, ...
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How to estimate empirically a demand curve

Suppose I have a small business that sell ice creams. An Icecream cost 2$, and every day I have different values of sales. ...
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Mathematical Proof as to why does the total revenue increase when the prices are increased for an inelastic product? [duplicate]

I was recently reading up on the Price Elasticity of Demand and the section of Inelastic demand mentions that if a firm has inelastic demand for its product and wishes to increase its total revenue ...
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Demand Curves for Stocks

i am currently working on a paper on demand curves for stocks and have some questions. I've read that many models (CAPM, APT, Modigliani-Miller theorem) assume demand curves for stocks to be flat. Can ...
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Is it sufficient to conclude by looking the following weekly demand schedule that the good is Perfectly Elastic?

The following is the demand schedule for cement over a period of one week:- NOTE: I have written the Price and Quantity demanded in tuples of the following form (Price, Quantity). So in the first ...
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Change in price and income using the Slutsky equation

Quantity bought is given by $$ q(m,p) = 0.02 m - 2 p $$ where $q$ is number of bottles bought, $m$ is income and $p$ is price per bottle. If income is $m = 7500$ and price is $p = 30$, the number of ...
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Calculate the elasticity of substitution of Epstein-Zin preferences

$$ \newcommand{\E}{\mathbb{E}} $$ Let a consumption sequence be given $C=(C_0, C_1,...)$ and let $C_t^+ = (C_t, C_{t+1}, ...)$. Now, suppose I have Epstein-Zin preferences, \begin{align*} U_t(C_t^+) &...
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Does the law of supply reject rise in total revenue for goods with elastic demand?

If demand for a product is elastic( consider the case when the price is low ), lowering the price further increases total revenue. However, as per the law of supply, low prices cause suppliers to ...
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Does unit elasticity has to be at exactly the middle of the demand curve?

Can unit elasticity be anywhere else on the demand curve other than the midpoint?
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Why is the Supply of Labour More Elastic in a Single Province/State then it is in the Country as a Whole?

Apparently, the federal government has a greater ability than provincial government to increase tax revenues by raising tax rates because the supply of labour is more elastic in a single province than ...
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Empirical set-up for measuring elasticity with respect to quality in an environment without price

I want to answer the broad question: In the absence of prices, how are decisions made? I have data on the determinants of market share in an environment without prices. So, imagine, person A chooses ...
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Why does price drop as a result of increase in supply

According to the Law of Supply, if price increases, there is an incentive for producers to produce more, and therefore the quantity supplied increases. However, for an inelastic good, if there is a ...
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Price Drops for Goods with Perfectly Inelastic Demand

When a change in price results in an infinitely large response in quantity demanded, demand is perfectly elastic. The perfectly elastic demand curve is horizontal. At price P, consumers will buy a ...
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Constant Elasticity of Substitution: Special Cases

Take an $n$-commodity constant elasticity of substitution utility function, $$U = \left[\sum^n_{i=1} \alpha_i x^\rho_i \right]^\frac{1}{\rho}$$ How do we show the following: Show that as $\rho \...
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How to show that the income elasticity of Marshallian demand is equal to unity? [closed]

Suppose that the expenditure function is multiplicatively separable in $\textbf{p}$ and u so that $$e(p,u) =k(u)g(\textbf{p}),$$ where k(·) is some positive monotonic function of a single variable, ...
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Effect of a good's inputs on elasticity of supply

I am trying the answer the question: If a good is produced using inputs for which there are no substitutes, the good's A. Elasticity of supply is likely to be small B. Elasticity of ...
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What determines the outcome of a price war, and why isn't that outcome reached instantaneously?

Mary is making a hefty profit manufacturing and selling widgets. Jim has some money laying around and he is trying to figure out if he shouldn't start manufacturing some widgets too. In this example ...
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Estimating price elasticity of demand

I have 25 quarterly observations and I want to estimate price elasticity of demand. I intented to use GMM-IV estimator. However, I read that it is not good for small samples. What can you suggest me? ...
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Why is perfect price inelasticity of demand not considered an exception to the law of demand?

Assume a case of perfect price inelasticity of demand. In such a case, PED = 0 The quantity demanded does not respond to changes in price, i.e. it remains constant, even when price increases ...
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Why do money markets fluctuate so much?

Compared to commodity markets, money markets move a lot. My guess is that commodity markets are less elastic due to fixed production costs. But I don't know if that is the correct explanation.
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Price elasticity of demand in the point of economic equilibrium

The function of demand is:\begin{align*} D(p) = 66-3p-p^2 \\\end{align*} The function of supply is: \begin{align*}S(p) = 4p^2+8p-114\\ \end{align*} The task is to find price elasticity of demand in ...
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Calibration of utility function parameters controlling labor disutility

Consider the very basic utility function $$ u(c, n) = \log (c) - \alpha \frac{n^{1 + \frac{1}{\nu}}}{1 + \frac{1}{\nu}}$$ Where $c$ is consumption and $n$ is working hours. As the Frisch elasticity ...
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Generalized KPR: Frisch Elasticity

Consider the following version of KPR preferences (with $l$ being leisure): $$ U(c,l) = \left(\left(c\right)^\gamma l^\omega\right)^{1-\sigma}$$ I'm after the Frisch elasticity: $$ \frac{\partial(1-...
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Intuition: Why does perfectly elastic supply imply no producer surplus?

Foreword: I ask NOT about the whole question; so I quote only the following part of the answer. Source: p 153, Question 7c, Principles of Microeconomics, 7 Ed, 2014, by NG Mankiw = Chapter 7, ...
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Horizontal demand curve

If it is assumed that every consumer within a particular region has the same 'valuation' for a certain product, and consumers will purchase no more than one unit of the product, is the market demand ...
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How does one derive the elasticity of substitution?

For two goods $x$ and $y$, the elasticity of substitution is defined as $$\sigma \equiv \frac{d\log\left(\frac{y}{x}\right)}{ d\log\left(\frac{U_x}{U_y}\right) }= \frac{\frac{d\left(\frac{y}{x}\right)}...
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Estimating Price Elasticity from sales

I'm looking at data for an online shop with clothing items listed at different prices. I'd like to use this information to do some kind of profit maximization (i.e. I'd like to have some understanding ...
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Housing Supply Elasticity: Proxy for Exogenous House Price Movements

Mian and Sufi (2014) say We use individual and zip code level data, and exploit cross-sectional variation in house price growth to estimate the impact of rising home values on borrowing and ...
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What is the difference between constant elasticity of substitution and elasticity of substitution?

What is the difference between constant elasticity of substitution and elasticity of substitution? Are these formulas related? How are they different concepts? I just did a whole problem set involving ...
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Relationship between Revenue-Elasticity and Price-Elasticity

I have attempted to solve this problem and would be grateful if someone looked over my solution 5% increase in price results in 5% decrease in total revenue. I need to determine price elasticity of ...
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Monopoly pricing under constant elasticity of demand

While reading Ch. 24-Monopoly from Intermediate Microeconomics by Hal Varian (8 th edition), on pg. 441, he writes that a monopolist will never choose to operate where the demand curve is inelastic. I ...
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Is elasticity purely an aggregate concept or can it be individualized

First question here. I am not an economist by training, but I do quite a bit of econometric analysis in my job (my background is maths). I often get asked about elasticity, and I am familiar with ...
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Is elasticity of substitution between goods empirically constant?

In New Keynesian models, we use a lot of CES assumption, usually Dixit-Stiglitz, to develop an economic model. Is CES, constant elasticity of substitution between goods, empirically (approximately) ...
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Find quantity from price elasticity

I have $P_1 = 24$, $Q_1 = 800000$, $P_2 = 32$ and price elasticity $e = -8$ and need to find the function $P(Q)$. I guess I need to find $Q_2$ by $$ \frac{(Q_2-Q_1)/Q_1}{-(P_2-P_1)/P_1} = -8 \...
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How does Perfect Elasticity imply infinite quantity for any higher price?

I reference Principles of Microeconomics, 7 Ed, 2014, by NG Mankiw. The graph above is from p 100. [p 99:] ...supply is perfectly elastic. This occurs as the price elasticity of supply approaches ...
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Composite Elasticities

Consider the following composite function $$ \lambda(\theta(J)) $$ If you want to think about it in more economic terms, think about it how values of firms $J$ affects market tightness $\theta$, and ...
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Production in the long run - calculating wage and rental elasticity of demand

I have data for a business firm for two periods. The data include: output (Q), capital (K), labor (L), wage (W) and the rental rate of capital (R). Here they are: ...
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If one always spends the same amount, what's one's price elasticity of demand?

Source: p 109, Question 5.9, Principles of Microeconomics, 7 Ed, 2014, by N Gregory Mankiw = Question 5.7, Principles of Microeconomics, 4 Ed, 2008, by N Gregory Mankiw 9. $\color{green } { \text { ...
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Intuition - Why does elasticity vary along a curve?

Source: p 96, Principles of Microeconomics, 7 Ed, 2014, by N Gregory Mankiw Even though the slope of a linear demand curve is constant, the elasticity is not. This is true because the slope is ...
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Intuition: Difference in price elasticities of demand due to different bases

Source: pp 91-92, Principles of Microeconomics, 7 Ed, 2014, by N Gregory Mankiw If you try calculating the price elasticity of demand between two points on a demand curve, you will quickly ...
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Suitable terminology for the inverse elasticity?

In many microeconomic applications (e.g. monopoly price-setting) the inverse elasticity appears. Explaining such relations to laymen is often awkward because inverse proportionality is not as ...
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Am I using quantity and price correctly in trying to calculate price elasticity of supply?

The problem I am considering involves a firm that is a price-taker and sells its good at price $p$. From the production function, I calculated the cost function and the profit-maximizing level of ...
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Help with Income Elasticity Exercise in Becker's Economic Theory

On page 18 of his book Economic Theory, Gary Becker provides the reader with the following exercise (no answers given): Exercise Statement: Write the formula $\sum_j K_jN_j = 1$ where $N_j$ is the ...
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How does economics cope with production processes that have large lumpy investment requirements?

If seems that all equations (e.g. Price elasticity of supply ) assume that there is a marginal cost of production that is nicely related to the level of output. But clearly you can’t buy half a new ...
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Price Elasticity of Demand for Positive Price Increases

What does it mean when the price elasticity of demand %Qd/%P is greater than one? Typically I hear that it means the demand is elastic since if, say, the price decreases by 1% the demand for the ...