Ch5 Elasticity

Ch5 Elasticity - Chapter 5: Elasticity and Its Application...

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Chapter 5: Elasticity and It’s Application Elasticity is a measure of how much buyers and sellers respond to changes in market conditions The Elasticity of Demand The Price Elasticity of Demand and Its Determinants Price of 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 (a measure of responsiveness) all else equal, when the price of a particular good falls, the quantity demanded for that good rises One type of elasticity measures how much demand will fall if prices raise Elasticity is a numerical measure of the responsiveness of Q d or Q s to one of its determinants. Loosely speaking, it measures the price-sensitivity of buyers’ demand Elastic when the quantity demanded responds substantially to changes in the price Inelastic if the quantity demanded responds to only slightly to changes in the price Elasticity reflects the many economic, social, and psychological forces that shape consumer preferences Availability of Close Substitutes Good with close substitutes tend to have more elastic demand It is easier for consumers to switch from that good to others Price elasticity is higher when close substitutes are available Necessities versus Luxuries Necessities tend to have inelastic demands Luxuries have elastic demands Definition of the market
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Ch5 Elasticity - Chapter 5: Elasticity and Its Application...

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