ECO105Y1 Lecture Notes - Lecture 5: Normal Good, Substitute Good, Tax Incidence
Document Summary
Elasticity measures how responsive quantity demanded is to a change in price. Elasticity (or price elasticity of demand) measures by how much quantity demanded responds to a change in pric e. Inelastic demand small response in quantity demanded when price rises. Elastic demand large response in quantity demanded when price rises. Perfectly inelastic demand price elasticity of demand equals zero; quantity demanded does not respond to change in price. Perfectly elastic demand price elasticity of demand equals infinity; quantity demanded has infinite response to change in price. The price elasticity of demand is influenced by. Available substitutes more substitutes mean more elastic demand. Time to adjust longer time to adjust means more elastic demand. Proportion of income spent greater proportion of income spent on a product or service means more elastic demand. Elasticity determines business pricing strategies to earn maximum to tal revenue cut prices when demand is elastic and raise prices wh en demand is inelastic.