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Economics Primer 3: Elasticity

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Elasticity refers to how sensitive supply and demand are to changes in price. If a small change in price results in a large change in supply or demand, we say that the supply (or demand) is elastic. If supply and demand are constant in the presence of price changes, then we say that the supply (or demand) is inelastic.

Let's look at examples. Coffee, for instance, is an item with an inelastic demand curve. Whenever I send my assistant out to procure coffee, she returns with a full cup no matter what it costs. If the price increased ten-fold, she would still return with a full cup. If she didn't, I would find another graduate student who is price insensitive -- that is, one with an inelastic demand curve for coffee -- and who knows how to value my tutelage.

So much for theory. As a practical matter, almost all supply and demand is inelastic. For instance, people need education, shelter, and medical care -- and will therefore purchase these items independent of what they cost. Which, of course, is why the government needs to step in and provide public education, rent control, and free health insurance. Otherwise, we would be at the mercy of greedy corporate interests and their inelastic supply curves; regardless of price, they will never provide enough schools, housing, and medical care. Today, we have a very tragic situation because the miserly government will not step in to pick up the slack and direct the corporations to do what is needed.

A benevolent government would have an inelastic supply curve. That is, a caring government would be sensitive to need, and supply whatever is requested by anyone at any time. You can think of "need" as being an inverse proxy for "price".

For non-technical people, this means that as need goes up, it's as though the price is going down -- and our elastic government will give, give, and give.

For very non-technical people, just think of Santa Claus. Or, if you prefer, think of my own personal generosity.

For the custodians of people with Downs Syndrome who enjoy having my columns read to them, just explain to your wards that in a perfect world, everyone will be treated like the way they usually are.

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Hmmm... I just had an interesting thought.

Could their be an elasticity of gov't revenues depending on the raising or lowering of taxes? If you raise taxes, how will that affect revenues? What happens if you lower taxes?

Is there a such thing as tax elasticity?

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Mr. Toohey:

A) When taxes are increases, revenues increase at an even greater rate because people are now working harder to make the same pay. So, taxes are highly elastic; raise them, and people will pay disproportionately more.

B) Lowering taxes is suicidal because government employees deserve more money, plain and simple.

Those are good questions; you are a relatively bright young man.


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If you pay workers more, will you get less or more productivity?

Is there a situation where you can have an inverse labor elasticity? In other words, the more you pay, the less you get in return...