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MARGINAL REVENUE PRODUCT AND FACTOR DEMAND: A perfectly competitive firm's factor demand curve is that negatively-sloped portion of its marginal revenue product curve. A perfectly competitive firm maximizes profit by hiring the quantity of input that equates factor price and marginal revenue product. As such, the firm moves along its negatively-sloped marginal revenue product curve in response to changing factor prices.
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                           RELATIVELY ELASTIC: An elasticity alternative in which relatively small changes in one variable (usually price) cause relatively large changes in another variable (usually quantity). In other words, quantity is very responsive to price. Quantity changes a lot in response to small changes in price. This characterization of elasticity is most important for the price elasticity of demand and the price elasticity of supply. Relatively elastic is one of five elasticity alternatives. The other four are perfectly elastic, perfectly inelastic, relatively inelastic, and unit elastic. | Alternative | Coefficient (E) | | Perfectly Elastic | E = ∞ | | Relatively Elastic | 1 < E < ∞ | | Unit Elastic | E = 1 | | Relatively Inelastic | 0 < E < 1 | | Perfectly Inelastic | E = 0 |
Relatively elastic means that relatively small changes in price cause relatively large changes in quantity. In other words, quantity is very responsive to price. More specifically, the percentage change in quantity is greater than the percentage change in price. Relatively elastic demand occurs when buyers can choose from among a large number of very close substitutes-in-consumption. In an analogous way, relatively elastic supply occurs when sellers are able to produce goods by switching resources among a large number of very close substitutes-in-production.The chart to the right displays the five alternatives based on the coefficient of elasticity (E). In technical shorthand (used by economists who write on really small pieces of paper), the coefficient of elasticity (E) is given as: 1 < E < ∞ This technical shorthand works for both the price elasticity of demand and the price elasticity of supply, because the negative value of the price elasticity of demand is ignored. If the negative sign on the price elasticity of demand is not ignored, then relatively elastic demand is specified as -∞ < E < -1. Two Curves| Relatively Elastic Curves |  |
Like many economic concepts, relatively elastic demand and supply are better understood with graphs. The blank graph presented here has devoted its entire life to displaying a relatively elastic demand curve and a relatively elastic supply curve. You can fulfill this purpose by clicking the corresponding buttons labeled [Demand] and [Supply].The primary observation to observe is that both curves are very flat. They are not perfectly horizontal, as would be true for perfectly elastic demand and supply, but they ARE very flat. The steepness of these curves is designed to visually indicate that relatively large changes in quantity result from relatively small changes in price. However, having highlighted the flatness of these curves, please note that slope and elasticity are two different concepts. In particular, it is NOT possible to determine the elasticity of a demand curve JUST by looking at its slope. A flat demand curve, like the one displayed here, actually could be relatively inelastic. The key to indicating relatively elastic demand is that this is the upper segment of the curve, the part near the vertical price axis. Separate examples of demand and supply should help illustrate relatively elastic demand and relatively elastic supply. DemandThe key for relatively elastic demand is that a good has numerous close substitutes-in-consumption. Buyers can easily switch between this good and other goods and receive about the same satisfaction. It takes very little change in the price to convince buyers to switch to a substitute good. A fabricated example offered for purposes of illustration is Hot Momma Fudge Bananarama Ice Cream Sundaes. While this product has several distinctive features (the Hot Momma Fudge people add a hint of clove extract to their hot fudge topping), it provides similar satisfaction to that of many other ice cream dessert treats. Should the price of Hot Momma Fudge Bananarama Ice Cream Sundaes rise a little, buyers will opt for Scrumptious Sam's Strawberry Sundae, Creamy Cathy's Hot Caramel Yogurt Treat, or hundreds of other alternatives. These do not provide exactly the same satisfaction, but they are close, very close.As such, the demand for Hot Momma Fudge Bananarama Ice Cream Sundaes is relatively elastic. Relatively small changes in the price of Hot Momma Fudge Bananarama Ice Cream Sundaes induce big changes in quantity. If the price rises a little, Hot Momma Fudge Bananarama Ice Cream Sundaes buyers switch to Creamy Cathy's Hot Caramel Yogurt Treat. If the price falls a little, Scrumptious Sam's Strawberry Sundae buyers switch to Hot Momma Fudge Bananarama Ice Cream Sundaes. These alternatives are close substitutes, it does not take much of a price change to induce buyers to switch. SupplyThe key for relatively elastic supply is that a good has several substitutes-in-production that use the same resources. In particular, it is very easy to switch resources between the production of this good and others using the same resources. In most cases the good uses very common, easy to find resources like unskilled or semi-skilled labor. One example of relatively elastic supply is Wacky Willy Stuffed Amigos (those cute and cuddly stuffed armadillos and tarantulas). The production and thus quantity supplied of these can be easily expanded by acquiring additional resources at about the same cost of the resources already employed. The semi-skilled labor used (sewers, stuffers, packers, shippers) is easy to train. The materials used (cloth, stuffing, thread) are readily available. It is just not a big deal to increase production.As such, the supply of Wacky Willy Stuffed Amigos is relatively elastic. The price received by The Wacky Willy Company only needs to change a little to induce significant changes in the quantity supplied.
Recommended Citation:RELATIVELY ELASTIC, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: April 23, 2025].
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