Questions tagged [elasticity]

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

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Why do lumber prices soar but cost of gypsum does not drop?

The cost of lumber has increased 3 fold over the last year, whereas the cost of other building materials such as gypsum has hardly budged. In North America, lumber is a dominant material used in the ...
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Can an inferior good be necessary?

Usually the definition of necessary goods is the income elasticity between 0 and 1. But can a good with -0.5 income elasticity be considered necessary? There is this link that says that all the ...
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Is it true that for Cobb-Douglas preferences, the demand function is always iso-elastic?

As we know that $Q*P=const.$ for Cobb-Douglas preferences, we can thus conclude that $\frac{dQ/Q}{dP/P}$ is always $-1$: $$ QP=const. \implies 0=d(PQ)=Q\ dP+P\ dQ \implies \frac{dQ}{Q}=-\frac{dP}{P} $$...
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How do I determine PED from price consumption curve with slope of zero?

Given a budget for two goods $x_1$ and $x_2$, a fixed price for good 2 and three prices for good 1 with the corresponding optimal amount of good 1 ($x_1$), I like to calculate the PED for good 1. By ...
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58 views

Without knowing the Slutsky equation and income/substitution effect, how can I show a certain good is inferior or Giffen?

Say I've got a function $x_1(p_1,p_2,m)$ where $p_1, p_2$ are the prices for good 1, good 2 respectively and m is the income. Now, I haven't heard of the Slutsky equation yet nor the income/...
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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}{\...
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36 views

Why are constant price elasticities reported?

Price elasticity of demand $\mathrm{e_{D,P} = \dfrac{dD}{dP}. \dfrac{P}{Q^*}}$ clearly depends on the levels of price and quantity. Then why is everywhere (research papers, textbooks etc.) a constant ...
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45 views

Calculating elasticity for $y^2e^{x+\frac{1}{y}}=3$

I want to calculate elasticity of y with respect to x for $$y^2e^{x+\frac{1}{y}}=3$$ My attempt: I calculate $y'$ using: $$y'= -\frac{f_1'(x,y)}{f_2'(x,y)} = - \frac{y}{2-y}$$ I calculated this using ...
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Pricing optimisation when elasticities are positives? [duplicate]

I’m performing some exercises in order to get the optimal price of some product such a potato chips, biscuits, drinks, etc. (I’m taking price per unit and sales in units) But I’ve found that some of ...
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Optimal price when elasticity of demand is positive? [closed]

I’m performing some exercises in order to get the optimal price of some product such a potato chips, biscuits, drinks, etc. But I’ve found that some of them have positive elasticities. This can makes ...
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Why do vacationers spend more on food and essentials than the locals?

I cannot think of an answer to this question from the chapter on elasticity in Tyler Cowen and Alex Tabarrok's Modern Principles of Economics, Second Edition: How might elasticities explain why ...
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Relation between marginal cost and output elasticities

Does anyone know of any results that show the link between marginal cost and the output elasticities analytically? I am looking at production and cost theory books but can't find any results that ...
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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 $$Y = F(K,L)$$...
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Question about using elasticities to compare difference rates but with different normalization

Lets say I am estimating a regression of a death rate per 100k people on an economic shock, so: $y = \beta_o + \beta_1 * X+ error$ where the dependent variable is the death rate, and x is the measure ...
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What's the minimum number of datapoints in order to run a diff-in-diff?

I was thinking about running a diff-in-diff with fixed effect in order to deal with a panel data experiment. The problem is that I don't know how many datapoints I need in order to the experiment be ...
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Does elasticity make sense for different levels of prices? If not, how can we fix that?

Let's say we know that our customers can't make sense of a raise in 5% of the price. It's too little for them to notice. However, an increase above 10% is easily noticed. If this is true, different ...
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Does it make sense to calculate price elasticity in respect to some percentage?

I was trying to calculate how much the price of a product impacts some company I'm analysing. At college, we learn that the price elasticity of demand is the percentage change in demand divided by the ...
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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. ...
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Elasticity of real marginal costs with respect to production

How does one get the formula for the Elasticity of real marginal costs with respect to production ($\omega$)? Woodford(2003) at page 152 says "$\omega$ represents the elasticity of s (real ...
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54 views

Homework Question - Price Floor / Elasticity of Demand

I'm currently taking undergrad microeconomics and came across the following question: The current price floor in the agricultural lettuce market makes it such that price of lettuce is 25% higher than ...
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Why wouldn't other firms follow suit if an individual firm decides to cut its price?

Why doesn't the demand curve an individual firm faces in a perfectly competitive market have the same elasticity as it does in a oligopolistic market? Under perfect competition, if a firm increases ...
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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 ...
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1answer
109 views

Long-term equilibrium price inelastic?

I have doubts about some economic interpretation: Why is the long-term equilibrium price inelastic? But in the short run, the equilibrium price is not necessarily inelastic. What is the economic ...
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78 views

Production function and elasticity

Let $y=x_1^\alpha x_2^\beta$ where $\beta=1-\alpha$ be a Cobb-Douglas production function. Find the elasticity of the optimal demand functions (for minimizing production cost) for both goods wrt. $w_2/...
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178 views

Elasticity of demand

I'm reading a paper from Pindyck (1988) where $$P_t=X_t-\gamma Q_t.$$ $P_t$ is the price, $X_t$ is the demand state variable, $Q_t$ production and $\gamma\geq0$ is apparently the ''(constant) demand ...
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Are economic profits above normal for many firms in a perfectly-competitive increasing-cost industry?

In a perfectly-competitive constant-cost industry, all firms will have normal profits in the long run. This fact is very clear to me as the long run supply curve is perfectly elastic and hence each ...
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33 views

Profit-maximization for a monopoly

Between two countries, Richland and Poorland, with a strict ban on cross-border sales agreed with the Poorlandian government. The respective demand functions for both countries are: $Q_{poor} = 10 - ...
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105 views

Elasticity Cobb-Douglas production function

I am given the production function $y=x_1^\alpha x_2^{1-\alpha}$, where $0< \alpha <1$ I found the demand functions for minimum production cost to be $ x_1^{*}(w_1,w_2,y)=\left ( \frac{w_2}{w_1}\...
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What does the following mean: "supply has positive elasticity”?

What confuses me in particular is that I always thought of the concept of ‘elasticity’ with respect to something. That is, supply of x can be elastic with respect to y. Am I missing something?
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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 ...
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Solving problem for optimal price (maximize profit) *attempt inside*

Let a demandfunction be defined as $D(p)=B-bp$, where $b,B>0$. A firm has some production cost, $c$, and can set the price $p$ under the constrain given by the Demand. What is the optimal price? ...
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Do barriers to entry increase the (collective) market power of incumbent suppliers?

For example in the case of the labour market lower immigration means that low-skilled labour can ask higher wages or better conditions (other things equal). Low skilled labour may have even put the ...
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How can I formulate price elasticity of demand equation when I want to add cross price elasticity?

I am trying to calculate the price elasticity of demand for a product where I used the equation log(volume) = elasticity * log(price) + seasonality dummies + trend index + CPI Here CPI is the consumer ...
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35 views

Elasticity of intertemporal sustitution with composite CRRA function

In the usual CRRA $\frac{c^{1-\sigma}-1}{1-\sigma}$ function we have that the intertemporal elasticity of sustitution $\partial\frac{c_{t+1}}{{c_{t}}{\partial r}}$ is $\frac{1}{\sigma}$. But how can ...
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Examples of bounded, positive, inverse demand curves

The three most common examples of demand curves I am aware of are \begin{align} Q&= b - aP,\\ Q&= bP^a,\\ Q&= b e^{-aP}\\ \end{align} The first being our classic linear demand curve, the ...
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Price elasticity of demand of CES

Anyone would like to help me show the following ( or a book/paper reference would be a great help) " The price elasticity of demand is equal to $\sigma$ for the demand function of CES preference,...
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Is saying that the demand is elastic or inelastic too oversimplified?

As we know that elasticity varies from infinity to zero as we move along a linear demand curve, then is it correct to label any demand curve elastic or inelastic as a whole?
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Estimating $dL/dw$ with direct dependencies using total differential

I have $U(C,L) = U(C) - v(L)$ where $C$ is consumption and $L$ is labor supply. From my first order conditions, $C$ is a function of $w$, wage, and $L$. $L$ is a function of $w$ and $C$. Leisure is $N ...
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why does income of executives level out in the long term after tax increases?

Marginal Revolution University has the following question in its Elasticity unit: In 1993, then President Clinton passed a law raising income taxes. This tax hike was fully expected: He campaigned on ...
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139 views

confusion regarding elasticity of a demand curve

The following question is on a quiz at Marginal Revolution University: https://mru.org/practice-questions/calculating-elasticity-demand-practice-questions The elasticity of demand is 2.0. Is the ...
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Non Linear regression to obtain diminishing marginal effect / elasticity

I am working with some real estate data on housing units. For a given market, I have data on occupied units, rents, and control variables such as population, demographics, income levels etc. I'd like ...
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Question on estimating elasticity and cross elasticity with log-log regression model

For a regression model: Y = B0 + B1.X + B2.X2 + U, B1 and B2 is the marginal effect on ...
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Interpretation of Demand and Cost Curves

I am currently starting on the topic of monopolies in school and I encountered the following scenario: A monopolist faces a demand curve given by $Q = \frac {100} p$ and a cost function given by $C = ...
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Microeconomics undergraduate ELASTICITY help (differentiating log-linear demand curve) [closed]

How do you show that the price elasticity of demand is a constant if the demand function is log-linear? To show this, how do you differentiate the log-linear demand curve to determine dQ/dp, and ...
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Log log regression with fixed effects and cross elasticity of demand

I have a time series of units sold, and price. I'd like to calculate elasticity of demand wrt to price and a few other variables, some of them are fixed effects. ...
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275 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 ...
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54 views

Regression approximation for the rate of change in occupancy rate of residential market with respect to price

I have historical data on occupancy rates for a given neighborhood, along with characteristics and other local economic variables. I am looking to estimate the regression equation with occupancy rates ...
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1answer
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Piketty's explanation of elasticity of substitution (from his book Capital in the 21st century)

I have some trouble following the explanation of the elasticity of substitution between capital and labor and its implications on p189. Take this part: The relevant question is whether the elasticity ...
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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 ...
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130 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. ...

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