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Chapter5 - Chapter 5 Elasticity and Its Application The...

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Chapter 5: Elasticity and Its Application The Elasticity of Demand 1. The Price of Elasticity of Demand and Its Determinants a. Price Elasticity of Demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price b. Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants c. Availability of Close Substitutes: c.i. Goods with close substitutes tend to have more elastic demand d. Necessities versus Luxuries: d.i. Necessities have inelastic demand d.ii. Luxuries have elastic demand e. Definition of the Market: e.i. Narrowly defined markets have more elastic demand (easier to find close substitutes) f. Time Horizon: f.i. More elastic demand over longer horizons 2. Computing the Price Elasticity of Demand a. Percentage change in the quantity demanded divided by the percentage change in the price b. Price elasticity of demand= % change in quantity demanded/ % change in price 3.
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