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Elasticity (The Variety of demand curves (Elastic Demand (greater than…
Elasticity
The Variety of demand curves
Elastic Demand
greater than one
Perfectly Inelastic
does not respond to price changes
Inelastic Demand
less than one
Perfectly Elastic
changes infinitely
Unit Elastic
changes by the same percentage as the price
The variety of supply curves
inelastic
more than one
perfectly elastic
Infinity
elastic
less than 1
perfectly inelastic
PES = 0
Unit elastic
PES = 1
The Price Elasticity of Demand and Its Determinants
Availability of close substitutes
Necessities versus luxuries
Definition of the Market
Time Horizon
Demand tends to be more elastic
if the good is a luxury
the more narrowly defined the market
the larger the number of close substituties
the longer the time period
The Price Elasticity of Supply and Its Determinants
Ability of sellers to change the amount of the good they produce
more elastic in the
long run
Percentage change in quantity supplied divided by the percentage change in price
Price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good
the percentage change in quantity demanded due to a percentage change in the price
Total revenue
amount paid by buyers and received by sellers of a good
TR = P X Q
Elasticity and total revenue along a linear demand curve
an increase the price leads to a decrease in quantity demanded. Thus, total revenue decrease
an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increase
Other Demand Elasticities
Income Elasticity
types of goods
Normal goods
Inferior goods
higher income raises the quantity demanded for
normal goods
but lowers the quantity demanded for
inferior goods