EconH200L5

EconH200L5 - Elasticity The price elasticity of demand...

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Elasticity The price elasticity of demand measures the sensitivity of the quantity demanded to changes in the price. Demand is inelastic if it does not respond much to price changes, and elastic if demand changes a lot when the price changes. Necessities tend to have inelastic demand. Luxuries tend to have elastic demand. Demand is elastic when there are close substitutes. Elasticity is greater when the market is defined more narrowly: food vs. ice cream. Elasticity is greater in the long run, as people are more free to adjust their behavior.
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Price elasticity of demand = Percentage change in quantity demanded Percentage change in price ª QP = ___ ___ ª PQ We use this formula instead of the slope, because the slope is sensitive to the units of measurement of price and quantity. Mankiw adopts the convention of reporting the absolute value of the price elasticity. Elasticity depends on where we are on the demand curve. For a straight line demand curve, elasticity is highest when the price is high (and quantity is low).
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EconH200L5 - Elasticity The price elasticity of demand...

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