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Elasticity and Its Applications - Coggle Diagram
Elasticity and Its Applications
The Price Elasticity of Demand and Its Determinants
Availability of Close Substitutes
Necessities versus Luxuries
Definition of the Market
Time Horizon
Elasticity
Sensitivity of demand to price
How sensitive behaviour (Q) is to its determinants (P’s and income) is important
What matters in practice is not
that D(P) slopes downwards
What matters is how steep D(P) is
One could summarise this by the slope
But the slope depends on the “units”
Economists prefer a unit-free measure
The Price Elasticity of Demand and Its Determinants
the larger the number of close substitutes.
if the good is a luxury.
the more narrowly defined the market.
the longer the time period.
Computing the Price Elasticity of Demand
Price elasticity of demand =
percentage change in quantity demanded/pc in price
The Variety of Demand Curves
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.
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
Quantity demanded responds strongly to changes in price.
Price elasticity of demand is greater than one.
Price elasticity of demand measures how much the quantity demanded responds to changes in the price.
Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.
If a demand curve is elastic, total revenue falls when the price rises.
If it is inelastic, total revenue rises as the price rises.