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ELASTICITY & ITS APPLICATIONS - Coggle Diagram
ELASTICITY & ITS APPLICATIONS
Allow us to analyze S & D with greater precision
Measure of how much buyers & sellers respond to changes in market conditions
The elasticity of D
Price elasticity of D is a measure of how much the Qd of a good responds to a change in the P of that good
% change in Qd given a percent change in the P
D more elastic when the larger the no. of close substitutes
D more elastic if the good is a luxury
D more elastic when the more narrowly defined the market
D more elastic when the longer the time perod
P elasticity of D = % change in Qd/% change in P
Inelastic D
Qd doesn't respond strongly to P changes
P elasticity of D < than 1
Elastic D
Qd responds strongly to changes in P
P elasticity of D is > than 1
Perfectly inelastic
Qd doesn't respond to P changes
Perfectly elastic
Qd changes infinitely with any changes in P
Unit elastic
Qd changes by the = % as the P
P elasticity of D measures how much Qd responds to the P
Slope of the D curve
Change in Q/change in P
Slope might be constant
Elasticity will still vary with P & Q
% change in Q/% change in P
TR & the P elasticity of D
TR is amount paid by buyers & received by sellers of a good
TR = P x Q
With an inelastic D curve, an increase in P leads to a decrease in Q that is proportionately smaller
TR increase
With an elastic D curve, an increase in the P leads to a decrease in Qd that is proportionately larger
TR decrease
Income elasticity of D
Measures how much the Qd of a good responds to a change in consumer's income
Income elasticity of D = % change in Qd/% change in income
Tell us how sensitive consumer spending on a particular good is to variations in the consumer incomes
Types of goods
Normal goods
0 < n < 1
Inferior goods
n < 0
Luxury goods
n > 1
Higher income raises the Qd for normal goods but lowers the Qd for inferior goods
The elasticity of S
Price elasticity of S is a measure of how much the Qs of a good responds to a change in the P of that good
The % change in Qs resulting from a % change in P
Determinants of elasticity of S
Ability of sellers to change the amount of the good they produce
Time period
S is > elastic in long run
Price elasticity of S = % change in Qs/% change in P