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1

Elasticity

Measure of responsiveness between any two variables

2

Price elasticity of demand

How responsive quantity is to a change in the good's price

3

Elastic demand

- When given % change in price of good causes an increase in the % change in Qd of good
- |E| > 1

4

Inelastic demand

- When given a % change in price of good causes an smaller % increase change in Qd
- |E| < 1

5

Perfectly inelastic demand

- Qd does not respond at all when price of good changes
- Vertical demand curve
- %∆Qd = 0

6

Perfectly elastic demand

- Goods have a horizontal curve; price does not change along demand curve
- If price increases, Qdemand would fall to 0
- If price decreases, Demand would go infinity
- E = infinity

7

Unit Elastic Demand

Percent change in good's price is equal to corresponding percent change in Qd for the good

8

Elasticity Coefficient (E)

- Indicate whether demand is elastic or inelastic
- %∆Qd / %∆P = percent change in quantity demanded over the percent change in price

9

Total Revenue

- Amount of $ earned when supplier sells given quantity of goods
- TR = P•Q

10

Elasticity and TR: Inelastic Demand

- |%∆P| > |∆Qd|
- Decrease P : Increase Q : Increase TR
- Increase P : Decrease Q : Increase TR

11

Elasticity and TR: Elastic Demand

- |%∆P| < |%∆Qd|
- Decrease P : Increase Q : Increase TR
- Increase P : Decrease Q : Decrease TR

12

Determinants of Price Elasticity of Demand

- Availability of substitutes
- Luxury vs. necessary goods
- Length of time available to adjust to price change
- Portion of income spent on good

13

Availability of goods

- People respond to increase in price of one good by substituting good whose prices have not changed

14

Luxury v. Necessary Goods

- Necessities: Increase in price does not change demand
- Luxury: Increase in price causes a cut in demand

15

Length of time available to adjust to price change

- Make adjustments if possible (increase in gas prices-->carpool, etc.)
- Cannot adjust immediately

16

Portion of income spent on good

- People less responsive to price changes for items that account for small portion of income