Chapter 3 Elasticity - Chapter 3 Elasticity 3.1 Price Elasticity of Demand Price elasticity of demand(or demand elasticity is the responsiveness of a

Chapter 3 Elasticity - Chapter 3 Elasticity 3.1 Price...

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Chapter 3: Elasticity 3.1 Price Elasticity of Demand Price elasticity of demand (or demand elasticity) is the responsiveness of a product’s quantity demanded to a change in price. Elastic demand is the demand for which a percentage change in a product’s price causes a larger percentage change in quantity demanded. Inelastic demand is the demand for which a percentage change in a product’s price causes a smaller percentage in quantity demanded. There are 2 extreme cases of demand elasticity. When a product has perfectly elastic demand , its price remains constant whatever quantities are demanded. Price never varies, so demand curve is horizontal. This applies to price-taker as some costs are too minor to affect the market. In contrast, when a product has perfectly inelastic demand , its quantity demanded is completely unaffected by price creating a perfectly vertical demand curve. (e.g. People are willing to pay any price for essential medication such as insulin) Total revenue is the total income earned from a product, calculated by multiplying the product’s price by its quantity demanded. TR = P x Q d If demand for a product is elastic, price changes cause large variations in quantity demanded. Since a price increase of a certain percentage causes an even bigger percentage decrease in quantity demanded, the sellers’ total revenue is reduced. Likewise, a price decrease of a certain percentage causes an even bigger percentage increase in quantity demanded raising total revenue for the sellers. When the demand for a product is inelastic, changes in price have less effect on quantity demanded.
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