09 Elasticity Part 2

09 Elasticity Part 2 - Elasticity 2 2/17/11 11:58 PM Price...

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Elasticity 2 2/17/11 11:58 PM Price Elasticity and Total Revenue If demand is elastic, then: E p >1, or % change in Q > % change in P So P increases decrease TR and vice versa If demand is inelastic, then: E p <1, or % change in Q < % change in P So, P increases increase TR and vice versa Companies can respond by adding in other factors other than price change, such as advertisement Other elasticities Income elasticity of demand : measures the response of Q d to a change in consumer income o For normal goods, income elasticity > 0 For necessities, staples, it is between 0 and 1 For luxury goods, it is greater than 1 For inferior goods, income elasticity < 0 Cross-price elasticity of demand : measures the response of demand for one good to the changes in the price of another o For substitutes, cross-price elasticity > 0 (e .g ., an increase in price of beef causes an increase in demand for chicken) o For complements, cross-price elasticity < 0
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This note was uploaded on 02/17/2011 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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09 Elasticity Part 2 - Elasticity 2 2/17/11 11:58 PM Price...

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