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Elasticity

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by

Sabrina Ren

on 3 February 2015

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Transcript of Elasticity

Elasticity
Inelastic Demand
24
21
18
15
9
12
6
20
24
Market
P × Q = $45
(Revenue)

20
24
Market
Percentage (%) change:
End value - Start value
Midpoint
* 100%
A
B
% change in P =
2 - 4
3
* 100%
= 67%
% change in Q =
18 - 12
15
* 100%
= 40%
Price elasticity of demand =
40%
67%
= 0.6
What determines price elasticity?
-Price elasticity is higher when close
substitutes
are available.
-Price elasticity is higher for
narrowly defined goods
than broadly defined ones.
-Price elasticity is higher for
luxuries
than for
necessities.
-Price elasticity is higher in the
long run
than the
short run
.
Perfectly Inelastic Demand
P
Q
D
Q1
P2
P1
Q
Q1
P2
P1
P
Demand Curve:

Vertical
Elasticity:

0

Sensitivity:

None
Q2
Demand Curve:
relatively steep
Elasticity:
<1
Sensitivity:
relatively low
Unit Elastic Demand
Q
Q1
P2
P1
P
Q2
Demand Curve:
intermediate slope
Elasticity:
1
Sensitivity:
intermediate
Elastic Demand
Q
Q1
P2
P1
P
Q2
Demand Curve:
relatively flat
Elasticity:
>1
Sensitivity:
relatively high
Perfectly Elastic Demand
Q
Q1
P1
P
Q2
Demand Curve:
horizontal
Elasticity:
infinity
Sensitivity:
extreme
Example:
20
30
0
0
67
0.11
1
20
30
200
29
22
40
40
22
29
67
200
2.31
9.09
0.43
{
{
Elastic
Inelastic
Unit Elastic
% change in P =
2 - 4
3
* 100%
= 67%
% change in Q =
10 - 20
15
* 100%
Price elasticity of Supply =
67%
67%
= 1
B
A
= 67%
Perfectly Inelastic Supply
P
Q
S
Q1
P2
P1
Supply Curve:

Vertical
Elasticity:

0

Sensitivity:

None
Inelastic Supply
Q
Q1
P2
P1
P
Q2
Supply Curve:
relatively steep
Elasticity:
<1
Sensitivity:
relatively low
Unit Elastic Supply
Q
Q1
P2
P1
P
Q2
Supply Curve:
intermediate slope
Elasticity:
1
Sensitivity:
intermediate
Elastic Supply
Q
Q1
P2
P1
P
Q2
Supply Curve:
relatively flat
Elasticity:
>1
Sensitivity:
relatively high
Perfectly Elastic Supply
Q
Q1
P1
P
Q2
Supply Curve:
horizontal
Elasticity:
infinity
Sensitivity:
extreme
S
S
S
S
D
D
D
D
What determines price elasticity?
The
more easily sellers can change the quantity they produce
, the greater the price elasticity of supply.
For many goods, price elasticity of supply is greater in the
long run
than in the
short run
, because firms can build new factories, or new firms may be able to enter the market.
How the Price Elasticity of Supply Can Vary?
{
{
Elastic
Inelastic
Full transcript