Elemental Economics Not Accounting, Not Business, Not Commerce, Not Mathematics  - Economics

Microeconomics

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Macroeconomics

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Dr. Harry Hillman Chartrand, PhD

Cultural Economist & Publisher

Compiler Press

215 Lake Crescent

Launched  1998

Microeconomics

4.0 Markets (cont'd)

 4.5 Equilibrium &  Elasticity

. Equilibrium (MKM C7/160-2; 149-51; 156-161; 142-146)

Equilibrium is a condition which once achieved will continue indefinitely unless one of the variables is altered (
PB ; MKM Fig. 4.8).  In the case of markets, the equilibrium price 'clears' the market, that is the quantity demanded by consumers equals the quantity supplied by producers.  More generally, economic theory recognizes four general types of equilibrium:

i - general equilibrium: a condition that exists in an entire economy given perfect competition in all industries.  It is a static state where all prices are at their lowest long run average cost per unit, individuals spend maximizing their satisfaction, demand for and supply of factors of production (Capital, Labour, Natural Resources) is also in equilibrium with all factors earning their opportunity cost;

ii - stable equilibrium:  a condition once achieved continues indefinitely with changes in a variable followed by reestablishment of the equilibrium.  Example: ball resting at the bottom of a cup; shake it, stop and the ball returns to the bottom;

iii - unstable equilibrium: a condition once achieved continues indefinitely with changes in a variable not followed by reestablishment of the equilibrium. Example: ball resting on the top of an overturned cup - shake it and the ball falls off never to return; and,

iv - multiple equilibria: a condition that exists in an entire economy with several points of stable equilibria but only one being optimal with respect to growth of the economy.

For purposes of this course only (ii) stable equilibrium will be examined.

2. Elasticity (MKM C5/98-118; 90-110; 98-117; 87-105)

Elasticity is the sensitivity of one variable to a change in another variable.  Unlike the constant slope of a straight line is measured ΔY/ΔX or rise over run, Elasticity varies even along a straight line (P&B 7th Ed Fig. 4.4; R&L 13th Ed Fig. 4-2; MKM Fig. 5.4).  It is measured  (ΔY2-Y1/Y1)/(ΔX2-X1/X1) i.e., the change in Y divided by the change in X.  Economic theory recognizes three principal types of elasticity:

i - income elasticity - with price constant, the change in demand caused by a change in income (P&B 4th Ed. Fig. 5.8);

ii - price elasticity - the change in demand or supply caused by a change in price (P&B 4th Ed. Fig. 5.8; 7th Ed Fig 4.3; R&L 13th ED. Fig. 4-2 & 4-3, MKM Fig's 5.1 a, b, c & d) or supply (P&B 7th Ed Fig.4.8; R&L 13th Ed Fig. 4-6, MKM Fig. 5.5 a, b, c, d & e.

iii - elasticity of substitution or cross-elasticity - either (a) the change in demand for a factor of production (Capital) caused by a change in the price of another factor (Labour); or, (b) the change in the demand for one commodity (hamburgers) caused by a change in price of a competing or substitute commodity (pizza) (P&B 7th Ed Fig.4.6).

In all three types elasticity may be:

greater than one (elastic) - a near horizontal demand or supply curve where a small increase in price causes a large change in demand or supply;

equal to one (unitary elasticity); or,

less than one (inelastic) - a near vertical demand or supply curve where a large change in price causes little change in demand or supply.

As will be seen, Elasticity places a critical part in choices of consumers and producers.