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Elasticity feb11

# Elasticity feb11 - Elasticity A way of measuring the...

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Elasticity A way of measuring the sensitivity of demand and supply to changes in prices and/or income Price Elasticity of Demand the percentage by which demand changes when price changes by one percent How do we describe the elasticity of demand? Elastic – if the price elasticity of demand is greater than one then demand is said to be elastic Unit Elastic – if the price of elasticity of demand equals one then demand is said to be unit elastic Inelastic – if the price elasticity of demand is less than one then demand is said to be inelastic The Revenue Test One way to determine whether demand is elastic, unit elastic, or inelastic is to see what happens to revenue when the price of a good changes Revenue = P X Qd(P) When the price increases P obviously increases. Less obvious is the fact that Qd decreases. There is a war going on P(up) -> Qd (down) ->Revenue(up) Revenue Test

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Elasticity feb11 - Elasticity A way of measuring the...

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