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econ review

# econ review - Ch.5 Elasticity to measure how much consumers...

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Ch.5 Elasticity- to measure how much consumers respond to changes in variables. Price Elasticity of Demand- measures how much the quantity demanded responds to a change in price. The demand for a good is elastic if the quantity demanded responds substantially to changes in the price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price. The price elasticity of demand for any good measures how willing consumers are to buy less of the good as its price rises. Availability of Close Substitutes Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. Necessities versus Luxuries Necessities tend to have inelastic demands, whereas luxuries have elastic demands Definition of the Market Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. Time Horizon

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o Goods tend to have more elastic demand over longer time horizons . o Economists compute the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in the price . o Because the midpoint method gives the same answer regardless of the direction of change, it is often used when calculating the price elasticity of demand between two points. Demand is considered elastic when the elasticity is greater than 1, which means the quantity moves proportionately more than the price. E>1 Demand is considered inelastic when the elasticity is less than 1, which means the quantity moves proportionately less than the price. E<1 If the elasticity is exactly 1, the quantity moves the same amount proportionately as the price, and demand is said to have unit elasticity . E = 1 The flatter the demand curve that passes through a given point, the greater the price elasticity of demand. The steeper the demand curve that passes through a given point, the smaller the price elasticity of demand. In the extreme case of zero elasticity, shown in panel (a), demand is perfectly inelastic , and the demand curve is vertical.

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In this case, regardless of the price, the quantity demanded stays the same. As the elasticity rises, the demand curve gets flatter and flatter, as shown in panels (b), (c), and (d). At the opposite extreme, shown in panel (e), demand is perfectly elastic . This occurs as the price elasticity of demand approaches infinity and the demand curve becomes horizontal, reflecting the fact that very small changes in the price lead to huge changes in the quantity demanded.
Total revenue - the amount paid by buyers and received by sellers of the good. When demand is inelastic (a price elasticity less than 1), price and total revenue

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econ review - Ch.5 Elasticity to measure how much consumers...

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