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Elasticity (The variety of demand curves (Elastic Demand
Quantity…
Elasticity
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Income Elasticity of Demand
- measures how much the quantity demanded of a good responds to a change in consumers’ income
- percentage change in the quantity demanded / percentage change in income
Normal goods
- higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods
Inferior goods
- lower income raises the quantity demanded for inferior goods but lowers the quantity demanded for normal goods
Necessities goods
- Goods consumers regard as necessities tend to be income inelastic
Luxuries goods
- goods consumers regard as luxuries tend to be income elastic
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Elasticity
- allows us to analyze supply and demand with greater precision
- measure of how much buyers and sellers respond to changes in market conditions
The price elasticity of demand
- measure of how much the quantity demanded of a good responds to a change in the price of that good
- always measured in percentage terms
- the price elasticity of demand is the percentage change in quantity demanded due to a percentage change in the price
Determinants price elasticity of demand
- availability of close substitutes
- necessities versus luxuries
- definition of the market
- time horizon
Demand tends to be more elastic
- the larger the number of close substitutes
- if the good is a luxury
- the more narrowly defined the market
- the longer the time period
The price elasticity of supply
- measure of how much the quantity supplied of a good responds to a change in the price of that good
- percentage change in quantity supplied / percentage change in price
Determinants price elasticity of supply
- Ability of sellers to change the amount of the good they produce
- Time period
Total Revenue of the Price Elasticity of Demand
- amount paid by buyers and received by sellers of a good
- TR = P x Q
Inelastic demand curve
- an increase in price leads to a decrease in quantity that is proportionately smaller so total revenue increases
Elastic demand curve
- an increase in the price leads to a decrease in quantity demanded that is proportionately larger so total revenue decreases
Computing the price elasticity of demand
- percentage change in quantity demanded / percentage change in price
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Cross-price elasticity of demand
- percentage change in quantity demanded of good 1 / percentage change in price of good 2
Computing the Price Elasticity of Supply
- percentage change in the quantity supplied / percentage change in price