Summary Background Information Lecture 2

Summary Background Information Lecture 2 - Summary of...

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Summary of Background Information Lecture 2 1. Price elasticity of demand: percentage change in quantity demanded that results from a 1 percent change in price (= percentage change in consumption/percentage change in price) 2. Elastic: demand is elastic with respect to price if the price elasticity of demand is greater than 1 3. Inelastic: demand is inelastic with respect to price if the price elasticity of demand is less than 1 4. Unit elastic : demand is unit elastic with respect to price if the price elasticity of demand equals 1 5. Factors that influence price elasticity: 5.1. Substitution possibilities (higher elasticity if there are close substitutes for goods) 5.2. Budget share (higher elasticity if the items have a larger share of a person’s budget) 5.3. Time (higher elasticity if consumers have more time to adjust to a change in price) 6. Formula for price elasticity of demand = (P/Q) x (1/Slope of P) 7. Perfectly elastic demand: demand is perfectly elastic with respect to price if price elasticity of demand is infinite (slightest increase in price leads consumer to switch to substitutes; graph: horizontal straight line ) 8. Perfectly inelastic demand: demand is perfectly inelastic with respect to price if price elasticity of demand is zero (consumers cannot switch to substitutes or stop buying when
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