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Price elasticity of demand
The responsiveness of the quantity demanded of a commodity to changes in its price; defined as the percentage change in quantity demanded divided by the percentage change in price.
A demand relationship in which a givenpercentage change in price will result in alarger percentage change in quantitydemanded.
Unit elasticity of demand
A demand relationship in which the quantity demanded changes exactly in proportion to the change in price.
A demand relationship in which a given percentage change in price will result in a less-than-proportionate percentage change in the quantity demanded.
When we say that a commodity’s demand is elastic, we are indicating that consumers are relatively responsive to changes in price.
When we say that a commodity’s demand is inelastic, we are indicating that its consumers are relatively unresponsive to price changes.
Note: there will almost always be some responsiveness in quantity demanded to a price change. The question is how much.
perfectly inelastic demand,
A demand that exhibits zero responsiveness to price changes. No matter what the price is,the quantity demanded remains the same.
Perfectly elastic demand
A demand that has the characteristic that even the slightest increase in price will lead to zero quantity demanded.
- (8-2) (9-1) going from 8 → 9
1/2 / 1/8 = 4
Change in Q/[(Q1 + Q2)/2]
Change in P/[(P1 + P2)/2]
Changes in price do not change total revenues. When market demand is unit-elastic and the market price increases, total revenues will not change, nor will total revenues change if the market price decreases.
- Unit-elastic (Ep = 1)
- Price Decrease = No Change in TR
- Price Increase = No Change in TR
A negative relationship exists between changes in price andchanges in total revenues. That is to say, when market demand for an item is elastic,total revenues will rise if the market price decreases. Total revenues will fall if the market price increases.
- Elastic (Ep > 1)
- Price Decrease = TR↓
- Price Increase = TR ↑
A positive relationship exists between changes in price and total revenues. When market demand is inelastic and the market price increases, total revenues will go up. When the market price decreases, total revenues will fall. We therefore conclude that if demand is inelastic, price and total revenues move in the same direction.
- Inelastic (Ep < 1)
- Price Decrease = TR ↑
- Price Increase = TR ↓
Perfectly elastic supply
A supply characterized by a reduction in quantity supplied to zero when there is the slightest decrease in price.
Perfectly inelastic supply
A supply for which quantity supplied remains constant, no matter what happens to price.
Compliments and Substitues
Compliments are negative
Substitutes are positive
If the percentage change in the quantity supplied is just equal to the percentage change in the price, we call this