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chapter five

chapter five - Elasticity and Its Applications Price...

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Elasticity and Its Applications

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Price Elasticity of Demand Measures the responsiveness of quantity demanded to a change in price. Motivation
Price Elasticity of Demand Defined as the percentage change in quantity demanded divided by the percentage change in price. E ε = ( Q D /Q Dav )/( P/P av ) E Unit-free measure Calculation Examples

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Language of Price Elasticity of Demand Perfectly Inelastic ε = 0 Perfectly Elastic ε = ∞ Unit Elastic ε = 1 Inelastic ε < 1 Elastic ε > 1
Elasticity, Total Revenue, and the Linear Demand Curve A linear demand curve has elastic, unit elastic, and inelastic regions. If you are seeking to maximize profits, you never want to be on the inelastic portion of the demand curve. E Why? E You could raise total revenue by raising price (and lower your total costs at the same time).

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Factors Influencing Elasticity Availability of Close Substitutes (Necessities versus Luxuries and Definition of the Market are variations of this) Proportion of Income Spent on Goods E List of Examples Time Horizon E Example
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chapter five - Elasticity and Its Applications Price...

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