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 define Price Elasticity of Demand. Show equation a units-free measuer of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers' plans remain the same. Elasticity = Percent change in quantity demanded/Percent change in price Define 3 demand curves of elasticities. Examples of Elastic and Inelastic Demand. 1. Perfectly Inelastic Demand - quantity demanded remains constant when the price changes, then the price elasticity of demand is zero and inelastic. 2. Unit Elastic Demand - percent change in the quantity demanded equals the percent change in price, price elasticity equals 1 and is elastic. 3. Perfectly Elastic Demand - quantity demanded changes by an infinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity and elastic. (Ex. 2 soft drink machines side-by-side) Elastic Ex: automobiles, furniture Inelastic Ex: food, housing How does Elasticity change along a straight-line demand curve? at the mid-point of the curve, demand is unit elastic. Above the mid-point demand is elastic, below the mid-point demand in inelastic. How would a 1 percent price cut affect Total Revenue in each elastic demand environment? elastic: inc. quantity sold by more than 1%, total rev. inc. inelastic: inc. quantity sold by less than 1%, total rev. dec. unit elastic: inc. quantity sold by 1%, totoal rev unchanged. Total Revenue Test method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same. price cut inc total rev - elastic price cut dec total rev - inelastic price cut leaves total rev unchanged - unit elastic Magnitude of Elasticity depends on: The closeness of substitutes The proportion of income spent on the good The time elapsed since a price change Cross Elasticity of Demand measure of the responsiveness of the demand for a good to a change Cross elasticity of demand = Percent change in quantity demanded/percent change in price of a substitute or complement. Positive if substitutes, Negative if Complements Income Elasticity of Demand Define, equation, and range A measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same. Income Elasticity of Demand = % change in quantity demanded / % change in Income Can be positive or negative and falls into 3 ranges? -greater than 1: normal good, income elastic -positive, less than 1: normal good, income inelastic -negative: inferior good Elasticity of Supply measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same. Elasticity of Supply - % change in quantity supplied / % change in price 3 types of Elasticity of Supply Perfectly Inelastic Supply - (slope = 0) quantity supplied is fixed regardless of price Unit Elastic Supply - % change in price equals % change in quantity (needs to be linear line and pass through origin) Perfectly Elastic Supply - a price at which sellers will offer any quantity for sale, curve is horizontal and supply in infinite. Factors that influence Elasticity of Supply 1. Resources substitution possibilities -Zero elasticity for rare items with no substitutes; items with many substitutes have a very high elasticity and nearly horizontal supplies. 2. Time frame for the supply decision -3 types used to influence the length of time elapsed since a price change. -Momentary supply: response to supply after price change Long-run supply: response to supply after price change and all technology has been used Short-run supply: response to supply after price change when some technologically possible adjustments to production have been made.