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Hereunder is a brief explanation of the
Elasticity Key Terms
used in this Website.
- Also included are some other terms used throughout the site but which do not relate
exclusively to Elasticity
A C
D E G H I
J L
N O
P R
S T
U
Y
A
Absolute terms
The value of a number when its sign is
ignored. If the result of a formula results in -0.3, the absolute value of that
number is 0.3
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All other things being equal
- In Economics, only one variable is tested at
a time, therefore all other possible variables are held constant. Example: We say
that when the price of a good rises less will tend to be bought, all other things being
equal. What is being measured in this statement is what happens to the quantity
demanded when the price changes - changes in income, taste, quality etc. are not taken
into account. The Latin phrase used for "All other things being equal" is
"Ceteris Paribus"
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Arc Elasticity
of Demand
Arc Elasticity measures the
elasticity between two points on an Arc. An arc is a portion of a curve. Using
the Arc Elasticity formula eliminates the possibility of two apparently correct answers
depending on whether the price has risen or fallen
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C
CED
- Cross Elasticity of Demand. This
measures the proportionate change in quantity demanded of one good in response to a change
in price of another good. If there is to be cross elasticity, there must be some
relationship between the two goods in question. They must be either competitive (or
substitutes for each other) or they must be complementary goods which are used in
conjunction with each other
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Coefficient
This is the result you get
when you work out the Formula to measure elasticity. The significance of the number
is that if it is less than 1 (in absolute terms) it means inelasticity; if it is
greater than 1 (in absolute terms) it signifies elasticity; if it is equal to 1 (in
absolute terms) unity or unitary elasticity is achieved
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Competitive
Competitive goods are also
known as substitute goods, i.e., goods that may be readily substituted one for the
other. These are similar goods which are on a supermarket shelf competing for a
place in your shopping trolley
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Complementary Goods
Complementary goods are
goods which are used in conjunction with each other. The demand for one has an
effect on the demand for the other. They are also known as goods in Joint Demand
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Cross Elasticity of
Demand
Cross Elasticity of
Demand. This measures the proportionate change in quantity demanded of one good in
response to a change in price of another good. If there is to be cross elasticity,
there must be some relationship between the two goods in question. They must be
either competitive (or substitutes for each other) or they must be complementary goods
which are used in conjunction with each other
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D
Delta
The fourth letter of the
Greek alphabet. In Mathematics and in Economics it is used as a symbol to indicate
"change in" . We say "delta quantity" when we mean "the
change in quantity"
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Demand
Demand means the quantity of
a good which will be purchased at a given price. In Economics, Demand is taken to
mean "Effective Demand", i.e., demand backed up by purchasing power
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Demand Curve
A demand curve plots the
different quantities of a good which will be purchased at different prices. It is
more useful than the demand schedule or table which is used to generate it because,
with a curve, it is possible to determine what quantity will be demanded at any given
price within the scale of the graph
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E
Elastic
The application of the
formula results in an answer which is greater than 1 in absolute terms. The greater
the number, the greater the degree of elasticity
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Elasticity
Elasticity is used to
measure what percentage change in quantity demanded/supplied will occur if there is a 1%
change in price. Businesses use elasticity to determine whether they will have an
increase/decrease in revenue because of a price increase they impose. The Minister
for Finance uses Elasticity to determine whether an increase in VAT or excise duty will
result in an increase of revenue to the Exchequer
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G
Giffen Good
A Giffen Good is a good for
which the demand rises as price rises. It, therefore, has an upward sloping left to
right Demand Curve showing that the higher the price, the more will tend to be
demanded. This Giffen Good demand curve is known as a perverse demand curve because
it does not follow the usual downward-sloping left to right format. Bread is a
classic example of a Giffen Good. Goods bought for snob value (conspicuous
consumption) and goods the price of which is expected to further rise could also be
classed as Giffen Goods
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H
Hyperbola, Rectangular
This is the slope of the
Demand Curve when unity is achieved. It shows that for every 1% increase in price there
will be a corresponding 1% decrease in demand - resulting in the same amount of revenue
being earned. The rectangular area from any given point on the hyperbola to
the two axes is equal to the rectangular area from any other given point on the
hyperbola. This shows that, regardless of price, the revenue will be the same when a
good has unitary elasticity.
The Average Fixed Cost curve is also a rectangular hyperbola
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I
Income Elasticity of
Demand
Measures the proportionate
change in quantity demanded caused by a change in income of the population. The
formula used to calculate it is the same as the formula used to calculate Price Elasticity
of Demand - however, the sign will always be positive for Normal Goods
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Income, Nominal
The amount of money one
receives from the provision of a factor of production (Land, Labour, Capital, or
Enterprise) expressed in terms of the amount (i.e. number of Euro) of income received
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Income, Real
The amount of money one
receives from the provision of a factor of production expressed in terms of the purchasing
power of that income. One could get a 5% increase in nominal income, but suffer a 1%
loss in real income (purchasing power) if inflation rises to 6%
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Inelastic
The application of the
formula results in an answer which is less than 1 in absolute terms. The nearer the
number is to zero, the greater the degree of inelasticity
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Inferior Good
An Inferior Good is any good
which is not a Normal Good. It therefore includes all Giffen goods. However,
while all Giffen goods are Inferior goods, not all Inferior goods are Giffen goods. The
classic textbook example of an Inferior good is a remould tyre which has a negative income
effect. This means that less of them will tend to be bought when income rises
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Infinity
Infinity cannot be written
down because there are not enough particles in the universe to do so. However, we
use the concept of moving towards infinity in economics to demonstrate
both Perfect Elasticity and Perfect Competition
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J
Joint Demand
Joint Demand goods are goods
which are used in conjunction with each other. The demand for one has an effect on
the demand for the other. They are also known Complementary Goods
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L
Linear
When we plot a demand or
supply curve from given data, it is assumed that there is a correspondence between any two
given points. In other words, the two given points can be joined with no major
deviational pattern occurring between them
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N
Negative
The minus sign is
negative. The sign for Normal Goods under Price Elasticity of Demand will always be
negative. The sign for Inferior Goods under Income Elasticity of Demand will always
be negative. The sign for Complementary Goods under Cross Elasticity of Demand will
always be negative
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Normal Goods
Normal Goods are goods which
have a negative demand effect and a positive income effect. That means that more
will be demanded as price falls (negative demand effect) and that more will be demanded as
income rises (positive income effect)
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O
Origin
The bottom left hand corner
point of a positive graph, i.e., where the X and Y axes are equal to zero. Any
supply curve going through the Origin has Unitary Elasticity of Supply
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P
PED
An abbreviation for Perfect
Elasticity of Demand
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Perfect
The ideal state - which
probably does not exist in any sphere. In Economics we assume Perfection in Elasticity and
in Competition. We acknowledge that it probably does not exist, but use the
theoretical concept as a benchmark to see how far away from perfection Elasticity or
Competition has deviated
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Perfect
Elasticity
Perfect Elasticity, if it
were to exist, means that an infinite quantity would be demanded at a given price, and
that none would be demanded at any other price. Hence there would be a horizontal
demand curve moving towards infinity. It is, of course, a nonsense because if a
consumer is willing to demand a good at �x, the consumer (if acting rationally) is also
willing to demand that same good at �x-1.
The application of the formula for measuring Price Elasticity of Demand results in
infinity
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Perfect
Inelasticity
Perfect Inelasticity, if it
were to exist, means that the same quantity, Q, would be demanded regardless of the price
of the good. One could argue that food has Perfect Inelasticity because it is
necessary for survival, and that is true while we consider food in a generic manner.
But nobody could argue that the demand for any particular food is perfectly inelastic.
The application of the formula for measuring Price Elasticity of Demand results in Zero
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Point
Elasticity of Demand
This is measuring the
elasticity at a given point on a curve, rather than between two points as we do when we
use Arc Elasticity of Demand
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Positive
The plus sign is
positive. The sign for Giffen Goods under Price Elasticity of Demand will always be
positive. The sign for Normal Goods under Income Elasticity of Demand will always be
positive.. The sign for Substitute Goods under Cross Elasticity of Demand will
always be positive
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Price
Elasticity of Demand
Price Elasticity of Demand
measures the responsiveness (or elasticity) of a good in respect of a change in the price
of that good. The greater the elasticity, the more responsive the good is to a
change in price. Unitary Elasticity happens when there is a one to one relationship
between price and quantity demanded. The application of the Arc Elasticity formula
is designed to show how far elasticity has moved from that one to one relationship -
greater than 1 means an elastic response, while less than one means an inelastic response
(all numbers are treated in their absolute values)
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Profit
The difference between
revenue (money taken in) and expenditure (money spent). Profit is, in Economic
terms, the return to the Entrepreneur for taking the uninsurable risks of running a
business. It is different from rewards to the other factors of production because it
is residual (what is left when all the other factors have been paid) and may be negative
(not all enterprises succeed)
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R
Rectangular Hyperbola
This is the slope of the
Demand Curve when unity is achieved. It shows that for every 1% increase in price there
will be a corresponding 1% decrease in demand - resulting in the same amount of revenue
being earned. The rectangular area from any given point on the hyperbola to
the two axes is equal to the rectangular area from any other given point on the
hyperbola. This shows that, regardless of price, the revenue will be the same when a
good has unitary elasticity
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S
Shift
A demand curve, or a supply
curve, is a graphical representation of the ratio between the X and Y axes. They
show the relationship between Price and Quantity. To measure what quantity will be
demanded/supplied at any given price one just traces that price from the Y axis and from
there down to the X axis. This is called measuring along the curve.
If anything other than Price causes a change in Quantity, this is represented by shifting
the curve to the right or to the left.
A demand curve will shift to the right (upward from the Origin)if more of the good is now
being demanded at any given price and vice versa.
A supply curve will shift to the right if costs of production have been reduced - to the
left if costs of production have been increased
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Substitute
Substitute goods are also
known as competitive goods, i.e., goods that may be readily substituted one for the
other. These are similar goods which are on a supermarket shelf competing for a
place in your shopping trolley
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index
T
Time-lag
If the price of something
increases, the consumer is sovereign insofar as s/he can take an immediate decision to buy
or not to buy. Not so with the supplier. If the price of a good goes up, the
supplier cannot always immediately increase the supply of the goods. There is quite
often a time-lag. Regardless of what happens to the price of strawberries in June,
the supplier cannot alter the quantity being supplied to the market - the decision on the
quantity was taken some months previously
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Total Revenue
Total Revenue is the total
amount of money received by a supplier of goods. It is the price of the Goods
(Average Revenue) multiplied by the quantity of goods which has been sold. Always
remember that Total Revenue is not Total Profit.
In Price Elasticity of Demand, if the demand for a good is inelastic, then a price
increase will bring about an increase in total revenue; if it is elastic a price
increase will result in a decrease in total revenue; if it is unitary a change in
price will not bring about a change in total revenue
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U
Unit / Unitary
Unitary or Unit Elasticity
occurs when the working out of the Arc Elasticity Formula results in an answer which is
equal to 1 in absolute terms. If it is a minus one (as it will be for normal goods
under Price Elasticity of Demand) there will be no change in total revenue as a result of
a price change because a 1% change in price will lead to a 1% change in quantity demanded
- in the opposite direction.
Be careful, though, that a plus one as an answer in Price Elasticity of Demand,
indicates that the goods are Giffen goods and would result in an increase in revenue as
price increases
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Y
YED
YED is an abbreviation for
Income Elasticity of Demand. The Y stands for "Yield" which is the same as
Income. The Y is used because the capital I is reserved in Economics for Investment.
It measures the proportionate change in quantity demanded caused by a change in income of
the population. The formula used to calculate it is the same as the formula used to
calculate Price Elasticity of Demand - however, the sign will always be positive for
Normal Goods
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