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AGGREGATE SUPPLY: The total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a given time period. Aggregate supply (AS) is one half of the aggregate market analysis; the other half is aggregate demand. Aggregate supply, relates the economy's price level, measured by the GDP price deflator, and aggregate domestic production, measured by real gross domestic product. The aggregate supply relation is generally separated into long-run aggregate supply, in which all prices and wages and flexible and all markets are in equilibrium, and short-run aggregate supply, in which some prices and wage are NOT flexible and some markets are NOT in equilibrium.
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                           COEFFICIENT OF ELASTICITY: A numerical measure of the relative response of one variable to changes in another variable. The coefficient of elasticity is used to quantify the concept of elasticity, including price elasticity of demand, price elasticity of supply, income elasticity of demand, and cross elasticity of demand. The coefficient can be calculated using the simple endpoint or midpoint formulas or with more sophisticated calculus and logarithmic techniques. The coefficient of elasticity captures the elasticity response between two variables, often with a single value. For example, in the analysis of the market, the law of demand relation between price and quantity is commonly indicated with a coefficient for the price elasticity of demand. A comparable coefficient for the price elasticity of supply is used to indicate the law of supply relation between price and quantity.A General FormulaThe general formula for the coefficient of elasticity between variables A and B is given as:coefficient of
elasticity | = | percentage change
in variable B
percentage change
in variable A |
This general formula takes a more specific form for actual calculations. One of the more common specific forms used is the midpoint elasticity formula:midpoint
elasticity | = | (B2 - B1)
(B2 + B1)/2 | ÷ | (A2 - A1)
(A2 + A1)/2 |
The first term on the right-hand side of the equation is the percentage change in variable B. The second term is the percentage change in variable A. The individual items are interpreted as this: A1 is the initial value of A before any changes, A2 is the ending value after A changes, B1 is the initial value of B before any changes, and B2 is the ending value after B changes.Four Common ElasticitiesThe most common applications for the coefficient of elasticity are price elasticity of demand and price elasticity of supply. Two other notable applications are income elasticity of demand and cross elasticity of demand. - Price Elasticity of Demand: On one side of the market is the price elasticity of demand. This is the relative response of quantity demanded to changes in the price. It is specified as the percentage change in quantity demanded to a percentage change in price.
- Price Elasticity of Supply: On the other side of the market is the price elasticity of supply. This is the relative response of quantity supplied to changes in the price. It is also analogously specified as the percentage change in quantity supplied to a percentage change in price.
- Income Elasticity of Demand: This is the relative response of demand to changes in income, or the percentage change in demand due to a percentage change in income. This elasticity quantifies the buyers' income demand determinant.
- Cross Elasticity of Demand: This is the relative response of demand to changes in the price of another good, or the percentage change in the demand for one good due to a percentage change in the price of the other good. This elasticity quantifies the other prices demand determinant.
While these four elasticities tend to make the greatest use of the coefficient of elasticity, whenever an elasticity relationship between two variables needs to be quantified, the coefficient of elasticity is bound to come into play.Follow the SignsThe positive and negative values resulting from calculating the coefficient of elasticity is generally important. The negative value for the price elasticity of demand indicates the law of demand and the positive value for the price elasticity of supply indicates the law of supply. However, the negative value of the demand elasticity is often ignored for comparison with supply elasticity and easy classification as perfectly elastic, relatively elastic, unit elastic, relatively inelastic, and perfectly inelastic.In contrast, the positive and negative values for income elasticity of demand and cross elasticity of demand are important. A positive income elasticity indicates a normal good, and a negative value indicates an inferior good. A positive cross elasticity indicates a substitute good, and a negative value indicates a complement good. Calculation AlternativesThe coefficient of elasticity can be calculated using several different techniques. In most introductory (classroom-type and textbook-type presentations), the coefficient of elasticity is calculated using the midpoint elasticity formula. While the midpoint formula is a relatively simple calculation, requiring only simply arithmetic, it often provides only an approximation of the actual elasticity of a relation, especially for a demand curve with a constant slope.More sophisticated coefficient of elasticity calculations can be had using more sophisticated mathematical techniques, including calculus and logarithmic equations. Whereas the midpoint elasticity formula indicates an average elasticity over a segment of a curve, point elasticity is the elasticity at a given point on a curve.
Recommended Citation:COEFFICIENT OF ELASTICITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2023. [Accessed: March 22, 2023].
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Today, you are likely to spend a great deal of time browsing about a thrift store hoping to buy either a set of steel-belted radial snow tires or a wall poster commemorating the 2000 Presidential election. Be on the lookout for crowded shopping malls.
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During the American Revolution, the price of corn rose 10,000 percent, the price of wheat 14,000 percent, the price of flour 15,000 percent, and the price of beef 33,000 percent.
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"Most of the things worth doing in the world had been declared impossible before they were done." -- Louis D. Brandeis, Supreme Court Justice
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MLE
Maximum Likelihood Estimator
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