Price Elasticity

# Price Elasticity - • Occurs when there is a decrease...

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Price Elasticity All products do not have the same demand curve Assume that is a seller decreases prices, then quantity demanded should by theory increase, BUT it depends on the elasticity of the demand of the product or service Elasticity refers to the changes in demand for a produce that occurs when the price changes There are 3 types of Elasticity o Unitary o Elasticity o Inelasticity UNITARY ELASTICITY Occurs when there is an increase in price and it results in an offsetting decrease in the quantity demanded and the total revenue is constant Price Quantity Revenue Original Situation \$1.00 100 \$100 Price Drops 50% \$0.50 200 \$100 Price Doubles \$2.00 50 \$100 ELASTICITY Occurs when there is a decrease in price and an increase in revenue What types of products are elastic? o Luxury Products o Products that have many substitutes Price Quantity Revenue Original Situation \$1.00 100 \$100 Price Drops 50% \$0.50 300 \$150 Price Doubles \$2.00 25 \$50 INELASTICITY

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Unformatted text preview: • Occurs when there is a decrease price and an increase in quantity demanded but the increase in the quantity demanded is not enough to change the revenue greatly. • What types of products are considered inelastic? o Necessities o Products that have few substitutes Price Quantity Revenue Original Situation \$1.00 100 \$100 Price Drops 50% \$0.50 120 \$160 Price Doubles \$2.00 90 \$180 What Determines Elasticity? 1. The availability of substitutes 2. Short vs. Long term (long is more elastic than short term) 3. % of income spent on the product (the higher % of income that a product/service consumes, the higher the elasticity) Perfect Inelasticity • Also called zero inelasticity • Occurs when price change has no effect on the quantity demanded • Ex. snow plow during a winter storm Theory of Elasticity * this graph is to be used when proving price elasticity Price Quantity Demanded Price Quantity Demanded D1 (inelastic) D2 (Elastic) QDE QD1 QD2...
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Price Elasticity - • Occurs when there is a decrease...

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