Elasticity refers to the variation of prices with changes in relative price. Elasticity also refers to the standard deviation of the mean price, which is a deviation from the perfect mean. With some statistics models, the elasticity of the substitution estimates the amount of elasticity of the substitution between variables. The concept of elasticity of the substitution assumes that there are constant inputs and constant outputs in a model economy. In a pure market model, the elasticity of substitution implies that there is a distinct level of output that is possible under any condition.
The elasticity of substitution is an economic concept that has both theoretical and real value. It is also referred to as elasticity of wage. The elasticity of the substitution relates to the elasticity of wages to substitution. The elasticity of the substitution relates to the elasticity of the substitution between variables and is used in economics to forecast output elasticity. In a competitive economy, it represents the proportionate percentage change from the established level of output with a change in one input, in response to a change in its prices.
Elasticity is equal to the slope of a curve that separates the high from the low prices in equilibrium. If the prices are set at different points then the curve between them defines the elasticity of the substitution between the variables. It is called the c2 curve. The slope of the curve defines the value of the elasticity of substitution between the output of one firm and the output of another firm.
the elasticity of the substitution can be positive or negative. A positive elasticity of substitution indicates that firms adjust to changes in prices so that they do not lose their anticipated profits. A negative elasticity of the substitution indicates that the profits of firms on the sale of inputs are lower than their costs of production or revenue. When the value of money is proportional to the value of production, then there is no increase in the cost of production, since firms have fixed their production and investment decisions.
To simplify the concept of elasticity of substitution, we assume that the firm determines the level of production, the level of investment, and the level of output and uses the existing resources efficiently. Inelastic substitution, the firm that utilizes the existing resources at a lower cost increases its profits without increasing the level of output and decreasing the level of expenditure. However, when the firm that increases its inputs increases its output relative to the firm that decreases its inputs then the firm that reduces its input costs will decrease its profits and increase its expenditure.
The concept of elasticity of the substitution considers four factors: elasticity of demand, the elasticity of investment, and marginal efficiency. The elasticity of demand refers to the tendency of demand to change. Say, for example, the firm that produces the best-priced sweater in town wants to expand its business. If it finds that the demand for sweaters in town has increased, it will invest more money into its business, consequently raising its profits. Now suppose that the demand for sweaters has decreased to the point that it is cheaper to buy a generic sweater than to buy a sweater produced by the shop that is producing the best-priced sweater. Since the firm that made the cheaper sweater still has a higher level of profits than the original producer, the elasticity of substitution here is for the original manufacturer to invest more money into expanding its business.
The elasticity of substitution a part of the MRTS in economics, you can read about in detail on thekeepitsimple a blogging website for management students.
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