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Elasticityofdemand 130830004111 Phpapp01
Elasticityofdemand 130830004111 Phpapp01
Elasticityofdemand 130830004111 Phpapp01
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Elasticity
Elasticity is a measure of how much buyers and sellers respond to
changes in market conditions.
Elasticity allows us to analyze supply and demand with greater
precision.
If something is elastic it is responsive, flexible, or readily changed.
A rubber band is elastic and with little force it easily stretches. A
chain on the other hand is rigid and changes very little when
pulled.
In the context of price elasticity of demand, the price change is
comparable to the force applied to a rubber band or chain and
the change in quantity demanded is comparable to the stretch.
When consumers are relatively responsive to a price change, we
say that demand is elastic.
When the change in quantity demanded by consumers is relatively
small in response to a price change, we say that demand is
inelastic.
(10 8)
100
10 20 percent
2
( 2.20 2.00) 10 percent
100
2.00
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Ranges of Elasticity
Inelastic Demand
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one.
Elastic Demand
Quantity demanded responds strongly to changes in price.
Price elasticity of demand is greater than one.
Perfectly Inelastic
Quantity demanded does not respond to price changes.
Perfectly Elastic
Quantity demanded changes infinitely with any change in price.
Unit Elastic
Quantity demanded changes by the same percentage as the price.
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A Variety of Demand Curves
Perfectly Inelastic Demand - Elasticity equals 0
100 Quantity
$5
2. ...leaves 11% decrease in
Quantity.
$4
Quantity
90 100 © iTutor. 2000-2013. All Rights Reserved
A Variety of Demand Curves
Unit Elastic Demand - Elasticity equals 1
Price 1. A 22 % increase in price...
$5
2. ...leaves 22% decrease in
Quantity.
$4
78 100 Quantity
Elastic Demand - - Elasticity is greater than 1
Price 1. A 22 % increase in price...
$5
2. ...leaves 67% decrease in
Quantity.
$4
Price
1. At any price
above $4, quantity
demanded is zero.
$4 Demand
2. At exactly $4,
consumers will
buy any quantity.
Percentage Change
Income Elasticity in Quantity Demanded
=
of Demand Percentage Change
in Income
Goods consumers regard as necessities tend to be income
inelastic.
Examples include food, fuel, clothing, utilities, and medical
services.
Goods consumers regard as luxuries tend to be income elastic.
Examples include sports cars, furs, and expensive foods.
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