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Chapter 4: Elasticity (Price elasticity of demand (Price elasticity of…
Chapter 4: Elasticity
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Elasticity of supply
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a measure of the responsiveness of quantity supplied to a change in price of a good all other factors remaining the same
Total revenue test
-method of estimating the PED by observing the change in total revenue from a change in price
-if a price cut increases total revenue, demand is elastic
-if a price cut decreases total revenue, demand is inelastic
-if a price cut leaves total revenue unchanged, demand is unit elastic
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When elasticity is unit elastic, the percentage decrease/increase in Qd/Qs equals the change in price for that good