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Chapter 4

Chapter 4 Elasticity.docx

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ECON 101
Emanuel Carvalho

Price Elasticity of Demand Price elasticity of demand measures responsiveness of quantity demanded to change in price Ep = %age ∆ in quantity demanded %age ∆ in price of the commodity When Demand Is Ep = 1 Unitary price elasticity of demand  The percentage change in the quantity demanded is exactly equal to the percentage change in price. Ep = (o1) increase total revenue Unit Elastic (Ep = 1) no change in total revenue Inelastic (Ep < 1) decreased total revenue Elasticity of demand depends on: If the commodity is defined as necessary such as food  Necessities generally have poor substitutes and inelastic demands  Luxuries generally have many substitutes and elastic demands Proportion of income spent on good  Low proportion of consumer income spent on the good (Inelastic Ep)  High proportion of consumer income spent on the good (Elastic Ep) Time elapsed since price change  The greater the time allowed to pass the more elastic the price e
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