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Week 4&5: Elasticity and Its Applications - Coggle Diagram
Week 4&5: Elasticity and Its Applications
Elasticity
analyze supply and demand with greater precision.
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.
Week 4&5: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
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 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.
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.
Elastic Demand
Quantity demanded responds strongly to changes in price.
Price elasticity of demand is greater than one.
Total Revenue and the Price Elasticity of Demand
Total revenue is the amount paid by buyers and received by sellers of a good.
TR = P x Q
Income Elasticity of Demand
Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
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.
In most markets, supply is more elastic in the long run than in the short run.
The income elasticity of demand measures how much the quantity demanded responds to changes in consumers’ income.
Price elasticity of demand measures how much the quantity demanded responds to changes in the price.