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DEFAULT RISK: The probability that a borrowing agent will not pay in full the agreed interest and/or principal. A default risk can be assigned to any bond or loan agreement. Of course, there are some instruments considered default-risk-free, that is, instruments for which the probability that a borrowing agent will not pay is zero. The most noted examples are the U.S. Treasury securities, which have virtually no default risk because the U.S. government guarantees that all the principal and interest will be repaid. When calculating the risk premium on financial instruments, investors use default-risk-free instruments for comparison.
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                           ELASTICITY ALTERNATIVES: Five categories of elasticity that form a continuum indicating the relative responsiveness of a change in one variable (usually quantity demanded or quantity supplied) to a change in another variable (usually price). These five alternatives--perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic--are most often used to categorize the price elasticity of demand and the price elasticity of supply. The five elasticity alternatives--perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic--reflect the entire range of elasticity responsiveness between two variables, especially price and quantity. At one end of the range is perfectly elastic in which an infinitesimally small change in price results in an infinitely large change in quantity. At the other end is perfectly inelastic in which quantity is fixed and unaffected by any change in price.| Alternative | Coefficient (E) | | Perfectly Elastic | E = ∞ | | Relatively Elastic | 1 < E < ∞ | | Unit Elastic | E = 1 | | Relatively Inelastic | 0 < E < 1 | | Perfectly Inelastic | E = 0 |
The chart to the right displays the five alternatives based on the coefficient of elasticity (E). The negative value obtained when calculating the price elasticity of demand is ignored to allow for comparison with the price elasticity of supply.Perfectly ElasticThe top of the chart begins with perfectly elastic, given by E = ∞. Perfectly elastic means an infinitesimally small change in price results in an infinitely large change in quantity demanded or supplied. This elasticity alternative exists when the price is fixed, that is, an infinite range of quantities is associated with the same price. Perfectly elastic demand can occur, in theory, when buyers have the choice among a large number of perfect substitutes-in-consumption. In an analogous way, perfectly elastic supply can occur when producers have the ability to switch resources among a large number of perfect substitutes-in-production.Relatively ElasticThe second category is relatively elastic, in which the coefficient of elasticity falls in the range 1 < E < ∞. That is, the coefficient is between one and infinity. With relatively elastic demand and supply, relatively small changes in price cause relatively large changes in quantity. Quantity is very responsive to price. The percentage change in quantity is greater than the percentage change in price. Relatively elastic demand occurs when buyers have the choice among a large number of close but not perfect substitutes-in-consumption. In an analogous way, relatively elastic supply occurs when producers have the ability to switch resources among a large number of close but not perfect substitutes-in-production.Unit ElasticThe third category is unit elastic, in which the coefficient of elasticity is E = 1. In this case, any change in price is matched by an equal relative change in quantity. The percentage change in quantity is equal to the percentage change in price. Unit elastic is essentially a dividing line or boundary between elastic and inelastic.Relatively InelasticThe fourth category is relatively inelastic, in which the coefficient of elasticity falls in the range 0 < E < 1. That is, the coefficient is between zero and one. With relatively inelastic demand and supply, relatively large changes in price cause relatively small changes in quantity. Quantity is not very responsive to price. The percentage change in quantity is less than the percentage change in price. Relatively inelastic demand occurs when buyers can choose only among a small number of imperfect substitutes-in-consumption. In an analogous way, relatively inelastic supply occurs when producers have a limited ability to switch resources among a small number of imperfect substitutes-in-production.Perfectly InelasticThe final category presented in this chart is perfectly inelastic, given by E = 0. Perfectly inelastic means that quantity demanded or supplied are unaffected by any change in price. The quantity is essentially fixed. It does not matter how much price changes, quantity does not budge. Perfectly inelastic demand occurs when buyers have no choice in the consumption of a good. In an analogous way, perfectly inelastic supply occurs when producers have no ability to switch resources among the production of goods.
Recommended Citation:ELASTICITY ALTERNATIVES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: April 29, 2024].
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