# eco9.7 - •the longer the time period Inelastic Demand...

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Elasticity-allows us to analyze supply & demand with greater precision & is a The Elsasticity of Demand The price of elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. When we talk about elasticity, that responsiveness is measured in % terms. Price elasticity of demand = % Change in qty demanded / % change in price Because demand always responds in a negative direction, when the price goes up by 1%, the quantity will drop. The numerator will always be negative. What determines elasticity? •availability of close substitutes •necessities versus luxuries •definition of the market •time horizon Demand tends to be more elastic: •the larger the # of close substitutes •if the good is a luxury •the more narrowly defined the market

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Unformatted text preview: •the longer the time period 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 that one Perfectly Inelastic •Quantity demanded does not respond to price changes ex. insulin Perfectly Elastic •Quantity demanded changes infinitely with any changes in price Unit Elastic •Quantity demanded changes by the same percentage as the price Elasticity of demand changes at every point Price Elasticity at point A=P A /Q A * 1/Slope Total revenue is the amount paid by buyers and received by sellers of a good. Computed as the price of the good times the quantity sold. TR=P*Q a.250/day b..50/500 • 1/-10 = -1 c....
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eco9.7 - •the longer the time period Inelastic Demand...

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