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**preview**shows half of the first page. to view the full**2 pages of the document.**Elasticity

Price Elasticity of Demand

π = πππππππ‘πππ πβππππ ππ ππ’πππ‘ππ‘π¦ ππππππππ

πππππππ‘πππ πβππππ ππ πππππ

Use average P and QD (i.e. π and ππ·) so that πis the same for a price rise as for a price fall.

Ignore negative sign, treat πas a positive number

Elasticity along linear demand is not constant i.e.:

π> 1 at prices above midpoint

π= 1 at midpoint

π< 1 at prices below midpoint

Classification of Elasticities

π= 0 completely inelastic (vertical)

0 < π< 1 inelastic

π= 1 unit elastic

π > 1 elastic

π = infinity completely elastic (horizontal)

Determinants of Elasticity

πdepends on the ability and willingness of buyers to substitute between products and is higherβ¦

β In the long-run than in the short-run

β If goods have closer substitutes

β If goodβs price is a larger part of buyers income

Elasticity and Consumer Spending

Consumer spending = π Γ ππ·

If demand is elastic then

%π₯ ππ ππ· > %π₯ ππ π

Lower prices /\ spending, higher prices \/ spending

If demand is inelastic then

%π₯ ππ ππ· < %π₯ ππ π

Lower price \/ spending, higher prices /\ spending

If demand is unit elastic then

%π₯ ππ ππ· = %π₯ ππ π

Spending is unaffected by price changes

Elasticity Exercises

1. Fill in the table and the graphs

In notebook

2. Drought higher or lower revenues

In note book

3. Price of train ticket

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