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ELASTICITY - Coggle Diagram
ELASTICITY
The Total-Revenue Test
Elastic Demand
TR changes in opposite direction from price
Inelastic Demand
TR changes in the same direction as price
Unit Elasticity
TR does not change when price changes
Price Elasticity along a Linear Demand
A slope can be linear even when elasticity varies
Price Elasticity and the Total-Revenue Curve
First slopes upwards, reaches a maximum, and finally turns down
Price Elasticity of Demand
The Price-Elasticity Coefficient and Formula
Using Averages
Midpoint Formula
Using Percentages
Absolute changes arbitrarily affect our impression of buyer responsiveness
Correctly compare consumer responsiveness
Elimination of Minus Sign
Avoid ambiguity
Interpretations of Coefficient of Price Elasticity of Demand
Elastic Demand
Coefficient of price elasticity of demand will be greater than 1
Inelastic Demand
Coefficient of price elasticity of demand will be less than 1
Unit Elasticity
Coefficient of price elasticity of demand will be exactly 1
Extreme Cases
Perfect inelasticity
Coefficient of price elasticity of demand will be 0
Perfect elasticity
Coefficient of price elasticity of demand equals infinity
Determinants of Price Elasticity of Demand
Substitutability
More substitute goods equals greater price elasticity of demand
Proportion of income
Higher the price of a good relative to consumers' incomes, greater the price elasticity of demand
Luxuries versus Necessities
Price elasticity of demand is higher for luxury goods than for necessities
Time
Product demand is more elastic over time
Applications of Price Elasticity of Demand
Large Crop Yields
Demand for farm products are highly inelastic
Excise Taxes
The government pays attention to elasticity of demand when selecting goods and services to tax
Decriminalization of Illegal Drugs
Price Elasticity of Supply
The Immediate Market Period
Length of time in which producers are unable to respond to a change in price with a change in quantity supplied
The Short Run
Period of time too short to change plant capacity but long enough to use the fixed-sized plant more intensively
The Long Run
Period long enough for firms to adjust their plant sizes and for new firms to enter the industry
Applications of Price Elasticity of Supply
Antiques and Reproductions
Highly inelastic supply
Volatile Gold Prices
Highly inelastic supply
Cross Elasticity and Income Elasticity of Demand
Cross Elasticity of Demand
Substitute Goods
Cross elasticity of demand is positive
Complementary Goods
Cross elasticity of demand is negative
Independant Goods
Zero or near-zero cross elasticity
Application
Income Elasticity of Demand
Normal Goods
Income-elasticity coefficient is positive
Inferior Goods
Income-elasticity coefficient is negative
Insights