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Elasticity, Definition: The Total Revenue Test is a concept used in…
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Definition: The Total Revenue Test is a concept used in economics to determine the price elasticity of demand for a product by examining the effect of a price change on total revenue.
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Application:
Elastic Demand: If a price decrease leads to an increase in total revenue, demand is elastic (PED > 1).
Inelastic Demand: If a price decrease leads to a decrease in total revenue, demand is inelastic (PED < 1).
Unit Elastic Demand: If a price decrease leaves total revenue unchanged, demand is unit elastic (PED = 1).
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Definition: PED is a measure of how responsive the quantity demanded of a good or service is to changes in its price.
Coefficient: PED is represented by a numerical coefficient, typically denoted as "Ed," which quantifies the responsiveness of demand to price changes.
Elasticity Categories:
Elastic: PED > 1
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Ed > 1 implies that a percentage change in price leads to a greater percentage change in quantity demanded.
Inelastic: PED < 1
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Ed < 1 indicates that a percentage change in price results in a smaller percentage change in quantity demanded.
Unit Elastic: PED = 1
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Ed = 1 indicates that a percentage change in price corresponds to an equal percentage change in quantity demanded.
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Definition: PES measures the responsiveness of the quantity supplied of a good or service to changes in its price.
Short Run vs. Long Run:
Short Run: PES often tends to be inelastic in the short run, as it's challenging to change production levels rapidly.
Long Run: In the long run, PES can become more elastic as firms have more time to adjust production processes, capacity, and resources.
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Definition: YED measures how the quantity demanded of a good changes in response to changes in consumer income.
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Interpretation:
Positive YED (+YED): Indicates a normal good. An increase in income leads to an increase in the quantity demanded, and vice versa.
Negative YED (-YED): Indicates an inferior good. An increase in income leads to a decrease in the quantity demanded, and vice versa.
Zero YED (0YED): Indicates a necessity or constant good. Changes in income have little to no effect on the quantity demanded.
Definition: XED measures how the quantity demanded of one good responds to a change in the price of another related good.
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Interpretation:
Positive XED (+XED): Indicates substitute goods. An increase in the price of Good B leads to an increase in the quantity demanded of Good A, and vice versa.
Negative XED (-XED): Indicates complementary goods. An increase in the price of Good B leads to a decrease in the quantity demanded of Good A, and vice versa.
Zero XED (0XED): Indicates unrelated goods. Changes in the price of one good have no significant effect on the quantity demanded of the other.