Questions tagged [elasticity]

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

Filter by
Sorted by
Tagged with
23
votes
4answers
2k views

What are Giffen Goods?

What exactly are Giffen goods and are they of purely theoretical interest or has there been empirical evidence of their existence?
15
votes
1answer
12k views

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)}...
15
votes
2answers
2k views

How is price elasticity determined in practice?

Price elasticity of demand and Price elasticity of supply are two of the most important concepts of microeconomics, but they're generally explained from a hypothetical standpoint, and little effort is ...
13
votes
5answers
4k views

Econometrics: Is elasticity meaningful in my, or any, regression?

A few months ago I interned at this organization; and, as a going away present, I decided to spend my last week, with whatever off time I had, to investigate the factors that affect teacher salaries. ...
12
votes
1answer
798 views

What are estimates of the elasticity of demand for credit with respect to interest rates?

When interest rates go up one percent (not one percentage point), what happens to demand for credit? I've only been able to find two papers in this area: Gross and Souleles (2001) study credit cards ...
11
votes
1answer
454 views

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) ...
9
votes
3answers
3k views

Why absolute value in elasticities and marginal rate of substitution?

This is a point I find very confusing and very hard to justify to students. Depending on the books, one finds many different conventions regarding the sign of elasticities and marginal rate of ...
7
votes
3answers
15k views

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 ...
7
votes
2answers
1k views

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 =...
7
votes
2answers
1k views

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 \...
7
votes
2answers
493 views

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 ...
7
votes
2answers
1k views

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 ...
7
votes
2answers
1k views

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 ...
6
votes
2answers
685 views

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 ...
6
votes
1answer
1k views

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 ...
6
votes
2answers
819 views

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^+) &...
6
votes
1answer
82 views

When do workers versus capital owners share of income increase?

The share of total income obtained by workers rather than capital owners is for obvious reasons of interest. Assuming that the economy can be desribed by an aggregate production function $$Y = F(K,L)$$...
6
votes
1answer
5k views

How do I calculate price elasticity of demand using historical price and quantity data?

I work for a company that produces retail items and I am tasked with calculating the price elasticity of demand for a subcategory that shall remain unnamed. I have 5 years of monthly market data that ...
6
votes
1answer
235 views

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-...
6
votes
1answer
525 views

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 ...
6
votes
1answer
213 views

About intertemporal elasticity of substitution

The inter temporal elasticity of substitution between two periods of time is $$\sigma=-\frac{d[\ln(c(s)/c(t))]}{d[\ln(U'(c(s))/U'(c(t)))]}$$ I need to prove that $$\lim_{s \to t}\sigma = -\frac{U'(c(t)...
5
votes
4answers
14k views

Why are elasticities defined as logarithmic derivatives?

In my economics class, we often compute the elasticity of $Y$ with respect to $X$, $$\eta = \frac{\partial \log Y}{\partial \log X}.$$ You can compute this from the slope of a line fit to a log-log ...
5
votes
2answers
361 views

Proof coefficient in log-log model is equal to coefficient of elasticity

I am trying to see how we treat $\varepsilon$ in the following proof: Suppose we have a log-log single variable regression model $$ \ln(y) = \alpha + \beta \ln(x) + \varepsilon $$ then take partial ...
5
votes
2answers
709 views

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 ...
5
votes
1answer
273 views

What is the empirical price elasticity of demand for insulin?

A lot of textbooks say that demand for insulin is perfectly inelastic. I don’t think this is quite true (and I am a type 1 diabetic). It’s clearly very inelastic, but not perfectly so. There are ...
5
votes
1answer
107 views

Using an elasticity to evaluate changes in a dependent variable

Often in textbooks and online I see thte definition of an elasticity to be as follows: 1) $\epsilon = \frac{\frac{\Delta Y}{Y}}{\frac{\Delta X}{X}}= \frac{\partial \log Y}{\partial \log X}$ Thus, ...
5
votes
2answers
166 views

Can Linear Supply-Demand Equilibria Be Understood as a Feedback-Control Process?

I'm not an economist, but rather an applied mathematician working in control theory. I've recently been watching Berkeley's intro to econ course in a personal project to better understand economics ...
5
votes
1answer
173 views

Question on significance of different ways of measuring Price Elasticity of Demand

I'm a pre college student, self studying economics, I have a question regarding the different forms of measurement of Price Elasticity of Demand. The basic equation for PED with respect to a point $(...
5
votes
1answer
339 views

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 ...
5
votes
3answers
1k views

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 ...
5
votes
1answer
63 views

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.
5
votes
1answer
584 views

Estimating elasticity of substitution in nested CES functions

I have aggregate data on $L_t, K_t$ and $X_t$, and want to estimate elasticity of substitution parameters, $\gamma$ and $\sigma$ for these factors. Assuming the production function takes the following ...
5
votes
2answers
580 views

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? ...
5
votes
2answers
4k views

Elasticity of Durable Goods vs Non-Durable Goods

Does anyone know any seminal reference (either a paper in a top economics journal or a book) that compares own-price elasticities of demand for durable vs non-durable goods? My intuition tells me ...
4
votes
2answers
209 views

Relation of Engel-curve to income elasticity of demand; is the slope of the Engel-curve equal to the elasticity of income?

I learnt that $\frac{\Delta x}{\Delta m} \gt 0$ for normal goods, $\frac{\Delta x}{\Delta m} \lt 0$ for inferior goods, $\frac{\Delta x}{\Delta m} \gt 1$ for luxury goods and $0 \lt \frac{\Delta x}{\...
4
votes
4answers
10k views

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, Question ...
4
votes
3answers
6k views

Why is the Market-Clearing Price also an Equilibrium Price?

When the price is such that supply equals demand for e.g. bicycles, everybody who wants to buy a bike at that price gets one, and every bike gets sold. Everybody goes home happy and the marketplace ...
4
votes
1answer
620 views

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 ...
4
votes
2answers
3k views

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 ...
4
votes
1answer
94 views

Demand function estimation

The model specification is: $$D_{ij} = A + aP_{ij} + bY_{ij} + cN_{ij} + e_{ij}$$ where: $i, j$ = $i$-th year, $j$-th month, $D$= demand (outgoing minutes) $P$ = average price of call, $Y$ = ...
4
votes
0answers
54 views

Why does short run market supply become more elastic with more firms

I have heard a justification along the lines of this: The supply curve becomes flatter (more elastic) with more firms in the market, because a given increase in price calls forth more production when ...
4
votes
1answer
296 views

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})\...
3
votes
2answers
2k views

Elasticity and logarithms

Let's consider a relationship between $ y $ and $ x $, $ y = a x^b $. Taking log on both sides, we have $$ \log y = \log a + b \log x $$ Now, my textbook, Nicholson and Snyder's Basic Principles and ...
3
votes
2answers
278 views

First order condition of log functions in general and interpretation

In the following, a first order condition for a log function is calculated. I know how the left part was calculated, however, I am a little bit confused where the gamma on the right site comes from ...
3
votes
2answers
513 views

Does Modern Monetary Theory (MMT) provide a useful insight into how to manage the economy?

According to advocates of MMT, the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector. ...
3
votes
2answers
543 views

How exactly does elasticity relate to slope?

My book (Goodwin's Microeconomics in Context, pg. 117) states the following about price-elasticity of demand: Given two demand curves that go through a specific point on graphs with the same scale, ...
3
votes
2answers
123 views

Terminology, is elasticity used as “mean elasticity”?

Given a demand $q$ and a price $p$ sutch that $q=q(p)$, the elasticity of demand is given by, $\epsilon = \frac{p}{q}\frac{dq}{dp}$ which depends on the price. But, when reading papers about ...
3
votes
2answers
129 views

elasticity from inverse demand

I was wondering of my thinking here was right: Given $$ e=\frac{dQ}{dp}*\frac{p}{Q}, $$ where $ e $ is elasticity, $ dQ/dp $ is first derivative of demand function, $p$ is price and $Q$ is quantity. ...
3
votes
2answers
90 views

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 ...
3
votes
2answers
4k views

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 ...

1
2 3 4 5