GMS 402 Chapter 3: Chapter 3
7 Oct 2016
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Document Summary
Elasticity: a measure of the responsiveness of one variable to changes in another variable; resulting from a percentage change in another variable. Two aspects of an elasticity are important, (1)whether it is positive or negative, and (2)whether it is greater than 1 or less than 1 in absolute value. The sign of the elasticity determines the relationship between g and s. If elasticity is positive, an increase in s leads to an increase in g. If elasticity is negative, an increase in s leads to a decrease in g. Elastic demand: demand is elastic if the absolute value of the own price elasticity is greater than 1. Inelastic demand: demand is inelastic if the absolute value of the own price elasticity is less than 1. Unitary elastic demand: demand is unitary elastic if the absolute value of the own price elasticity is equal to 1.
