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Elasticity

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econclass econclass

on 29 January 2013

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Transcript of Elasticity

Tyson Wai, Sundeep Kaushal, Stuart Hsiao Basic Idea Some Cautions and Important Points Price Elasticity of Demand Determinants of Price Elasticity of Demand Total revenue (TR): The total number of dollars received by a firm from the sale of a product in a particular period

TR = PXQ Price Elasticity of Demand How much the quantity demanded changes as a result to price change Substitutability
more substitutes more elastic

Proportion of Income
Larger % of income the product costs More elastic

Luxuries versus Necessities
Luxury more elastic

Time
As time passes more elastic Total Revenue Test Elasticity Determinants of Elasticity Total Revenue Test Income Elasticity of Demand Cross-Price Elasticity of Demand % Change in Quantity Demanded Q2 - Q1 Q2 + Q1 2) Elasticity 2 Slope of Demand Curve 3) ED is proportional to the Price
- Consumers are more sensitive at higher prices P2 - P1 P2 + P1 2 % Change in Price Midpoint Formula Ed = BIG % changes in quantity responding to small % changes in price If Ed > 1 Demand Elastic: If Ed < 1 Demand Inelastic: small % changes in quantity responding to BIG % changes in price If Ed = 1 Unit Elastic % change in quantity = % change in price If Ed = 0
Perfectly Inelastic 0 % changes in quantity responding to any % changes in price If Ed = Infinity
Perfectly Elastic Infinite % change in quantity responding to any % changes in price Income Elasticity of Demand Cross-Price Elasticity of Demand Price Elasticity of Supply Price Elasticity of Supply If Price Increases Inelastic TR Increases
(P increase, Q decreases little)

Elastic TR Decreases
(P increase, Q decreases MUCH)

Unit Elastic TR doesn't change
(P increase, Q decrease by same %) % Change in Quantity Supplied % Change in Price Ed = How much the quantity supplied changes as a result to price change Measure of how sensitive consumption of good X is to a change in a consumer's income.

% Change in Quantity Demanded

% Change in Income







Ed = Sensitivity in the consumption of good X when a change occurs in the price of good Y Exy = % Change in the quantity demanded of good X % Change in the price of good Y END
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