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Elasticity and Its Applications - Coggle Diagram
Elasticity and Its Applications
Elasticity
allows us to analyze supply and demand with greater precision.
a measure of how much buyers and sellers respond to changes in market conditions
THE ELASTICITY OF DEMAND
Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.
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 substitutes.
the longer the time period.
the longer the time period.
The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.
The Variety of Demand Curves
Inelastic Demand
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one.
Elastic Demand
Price elasticity of demand is greater than one.
Quantity demanded responds strongly to changes in price.
Perfectly Inelastic
Quantity demanded does not respond to price changes.
Perfectly Elastic
Quantity demanded changes infinitely with any change in price.
Unit Elastic
Quantity demanded changes by the same percentage as the price.
Because the price elasticity of demand measures how much quantity demanded responds to the price, it is closely related to the slope of the demand curve.
Elasticity (own price)
Slope of D(P)
= change in Q / change in P
= ΔQ/ΔP
Elasticity of D(P)
= (ΔQ/Q)/(ΔP/P)
= (ΔQ/ΔP)/(Q/P)
Slope might be constant (linear D(P))
Total Revenue and the Price Elasticity of Demand
Total revenue is the amount paid by buyers and received by sellers of a good.
Computed as the price of the good times the quantity sold.
TR = P x Q
Elasticity and Total Revenue along a Linear Demand Curve
With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases.
With an elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.
Income Elasticity of Demand
Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
It is computed as the percentage change in the quantity demanded divided by the percentage change in income.
Computing Income Elasticity
THE ELASTICITY OF SUPPLY
Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.
Determinants of Elasticity of Supply
Ability of sellers to change the amount of the good they produce.
Beach-front land is inelastic.
Books, cars, or manufactured goods are elastic.
Time period.
Supply is more elastic in the long run.
Computing the Price Elasticity of Supply
The price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price.