elasticity of demand - loudoun county public schools · elasticity areas of greater inelasticity p...
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![Page 1: Elasticity of Demand - Loudoun County Public Schools · Elasticity Areas of greater Inelasticity P Q ... increases, thus a positive income elasticity of demand Inferior goods and](https://reader033.vdocuments.site/reader033/viewer/2022042105/5e838ab8b0144c4c07263860/html5/thumbnails/1.jpg)
Or the Price Elasticity of Demand
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Law of Demand = there is an inverse or negative relationship between price and quantity demanded
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Price Elasticity measures the effect on
Quantity Demanded due to changes in
Price
In other words, we want to know how big
a change in Qd will occur if we change
the Price.
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Price Elasticity of Demand measures the
sensitivity of consumers to a price
change
1) Large changes in qty. demanded due to
price changes = ELASTIC demand
2) Small or no changes in qty. demanded
due to price changes = INELASTIC
demand
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Elasticity of Demand =
Ignore the “minus” sign!!!!
= “change”
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This is an alternative method if you have a hard time with percentages:
Ed =
∆ Qd ÷ [(Q1+Q2)/2]
∆P ÷ [(P1+P2)/2]
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Elastic Demand• % ∆ in price is smaller than % ∆ in Qd, demand
is ELASTIC
OR
• If Ed > 1, then demand is ELASTIC
Inelastic Demand• % ∆ in price is larger than % ∆ in Qd, demand is
INELASTIC
OR
• If Ed < 1, then demand is INELASTIC
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What if % ∆ in price EXACTLY equals %
∆ in Qd?
Or, in other words…
Ed = 1?
You have “UNIT ELASTICITY”
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Elastic Product
D
D
Normally, a shallower
or less steep demand
curve
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Inelastic Product
D
DNormally, a steep
demand curve
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Unit elastic Product
D
DNormally, a rounded
demand curve
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Perfectly Elastic Product
D
D
A horizontal demand
curve
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Perfectly Inelastic Product
D
D
A vertical demand
curve
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Another way of determining elasticity is
the Total Revenue Test
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Elastic Demand:
Ed is elastic if:
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Inelastic Demand:
Ed is inelastic if:
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Unit elasticity of Demand:
Ed is unit elastic if:
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Substitutability• If # of substitutes is large, then Ed is greater
Proportion of Income• If price increase in relation to consumer
incomes, then Ed is greater
Luxuries vs. Necessities• Luxury items have greater Ed
• Necessity items have a lower Ed
Time• The longer the time period involved, the more
elastic a product demand becomes
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D
D
Areas of greater
Elasticity
Areas of greater
Inelasticity
P
Q
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Income Elasticity of Demand• Measures the change in quantity demanded as
consumer incomes change
Cross-Price Elasticity of Demand• Measures how the quantity demanded of one
good responds to the change in price of another
good
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Elasticity of Income Demand =
Normal goods and IEd = as income increases, Qd
increases, thus a positive income elasticity of demand
Inferior goods and IEd = as income increases, Qd
decreases, thus a negative income elasticity of demand
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Cross-Price Elasticity of Demand =
Substitute goods and CPEd = as the price of Good 2
increases, Qd of Good 1 increases, thus a positive CPEd
Complementary goods and CPEd = as the price of Good 2
increases, Qd of Good 1 decreases, thus a negative CPEd