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Elasticity of Demand

Elasticity of Demand. Elasticity. Elasticity of Demand - A measure of how consumers react to a change in price Inelastic- Your demand for a good that you will keep buying despite a price increase. Patented prescription drugs,

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Elasticity of Demand

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  1. Elasticity of Demand

  2. Elasticity • Elasticity of Demand- A measure of how consumers react to a change in price • Inelastic- Your demand for a good that you will keep buying despite a price increase. • Patented prescription drugs, • Elastic- Your demand for a good that you will buy much less of after a small price increase • Lobster,

  3. Calculating Elasticity • Price range • If the price of a magazine increases from 20 cents to 30 cents, it will be inelastic. If the price increases from $4 to $6, the demand will be much more elastic. • Elasticity= % change in demand of good/ % change in price of good. • Values of Elasticity • If the elasticity of demand is less than 1, INELASTIC • If the elasticity of demand is greater than 1, ELASTIC • If the elasticity of demand is exactly 1, UNITARY ELASTIC

  4. Factors Affecting Elasticity • Availability of Substitutes • Fewer substitutes—still may buy, even with a price increase. • Concert tickets, Life saving medicine • Lack of substitutes can make demand inelastic, wide choice makes demand elastic. • Relative Importance • If you spend a large amount of your income on a good, a price increase will force you to make tough choices. • Must reduce spending on that good. • If you spend half your income on clothes, and the price of clothes goes up, you will have to reduce your consumption of clothes. • If the price of shoelaces goes up, you wont really notice or spend less on shoelaces.

  5. Factors Affecting Elasticity • Necessities Versus Luxuries • Whether a person considers a good to be a necessity or a luxury impacts the good’s elasticity of demand for the person. • A necessity is a good that people will buy, even if the price goes up. • Parents consider milk to be inelastic. • Change over time • Price changes over time. People cannot respond right away. Demand is inelastic in the short term. • Gasoline is more inelastic in the short run, and more elastic in the long run.

  6. Elasticity and Revenue • Total Revenue- the total amount of money a firm receives by selling goods or services. • Pizza: 125 slices per day at $2 a slice…. • Total revenue and elastic demand: • Price goes down, Total revenue rises • Price goes up, Total revenue falls • Total revenue and inelastic demand: • As the price is lowered, Total revenue falls • As the price is raised, Total revenue rises

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