Economic Terms

An elasticity measure to measure the responsiveness of the quantity supplied by firms to changes in prices. These measures can become very useful evaluative tools when structuring an exam answer. to a data response question. This is because the impact of demand and supply curve shifts on the market equilibrium will depend on the position and slope of the supply curves and that is determined by the elasticity values of the good. 

To measure the elasticity of supply curves we use the Price elasticity of supply measure, as this provides intuitive analysis when evaluating the supply curve of a particular good. Using PES as an elasticity measure we can define a goods supply as having:

Elastic Supply

Inelastic Supply

Unit Elastic Supply

Perfectly Elastic Supply

Perfectly Inelastic Supply 

PES is a particularly useful and effective concept when evaluating demand curve shifts, as the impact on price and quantity will depend on the elasticity of the supply curve for the good. For instance, if a supply curve is inelastic then when there is a demand curve shift it will exacerbate the impact on price, but the impact on quantity will be muted. This is because when firms face an inelastic supply curve they are unable to change supply in line with price changes in the traditional way. This may be down to a number of different factors which restrict firms ability to change output. Below is an example of how the elasticity of the supply curve impacts the changes in the economic variables following an inwards demand curve shift.

In this case, there is an inwards demand curve shift and this creates pressure for the price to fall to P1 as a result of excess supply. This is the case regardless of the elasticity of the supply curve. However, as is shown in the diagrams, the more inelastic the supply curve the greater the price fall in the market. The opposite process would occur if the demand curve outwardly shifts. 

So this demonstrates that elasticity is a powerful evaluative tool when analysing changes in demand/supply curves and forms a crucial part in describing the chain of economic events that unfold in these types of markets.

 

Values which represent the degree of elasticity for a particular good.

Government issued permits authorising carbon emissions up to a certain level. They are often traded with efficient firms selling unused emissions to inefficient firms that need to exceed their emission permit to meet demand.

Research that informs theories by observing, measuring and analysing actual events.

When labour is engaged in the productive process in return for wages.

The factor that organises production. It provides the entrepreneurial/ management expertise that organises factors of production to earn profits.

A behaviour that leads people to take the risk of establishing a business to earn profits.

When there is no momentum for anything to change, This occurs when the market price is stable because the quantity demanded is equal to the quantity supplied.

Is the term used in game theory for the predicted optimal solution to a game.

In economics this concerns how fairly resources are distributed among economic agents.