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SELF-CORRECTION, INFLATIONARY GAP: The automatic process through which the aggregate market achieves long-run equilibrium by eliminating an inflationary gap created by short-run equilibrium. With an inflationary gap short-run equilibrium real production is greater than full-employment real production, meaning resource markets have shortages, and in particular labor is overemployed. Self-correction is the process in which these temporary imbalances are eliminated through flexible prices as the aggregate market achieves long-run equilibrium. The key to this process is shifts of the short-run aggregate supply curve caused by changes in wages and other resource prices. The long-run result is lower wages and a decrease in short-run aggregate supply.

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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.

AlternativeCoefficient (E)
Perfectly ElasticE = ∞
Relatively Elastic1 < E < ∞
Unit ElasticE = 1
Relatively Inelastic0 < E < 1
Perfectly InelasticE = 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 Elastic

The 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 Elastic

The 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 Elastic

The 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 Inelastic

The 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 Inelastic

The 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.

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Recommended Citation:

ELASTICITY ALTERNATIVES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: May 21, 2024].


Check Out These Related Terms...

     | elasticity alternatives, demand | elasticity alternatives, supply | perfectly elastic | perfectly inelastic | relatively elastic | relatively inelastic | unit elastic | elastic | inelastic |


Or For A Little Background...

     | elasticity | coefficient of elasticity | price elasticity of demand | price elasticity of supply | demand | supply | law of demand | law of supply |


And For Further Study...

     | elasticity and demand slope | elasticity and supply intercept | demand elasticity and total expenditure | income elasticity of demand | cross elasticity of demand | elasticity determinants |


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