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Elasticity Essay

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Below is an essay on "Elasticity" from Anti Essays, your source for research papers, essays, and term paper examples.

Economics Study Guide by Aram Kudurshian

Elasticity of Demand, Supply, Income, and Cross-Price Elasticity
Price Elasticity of Demand The elasticity of demand measures the sensitivity of a change in a variable such as in this case, price, and the demand for that good. In other words, it measures the responsiveness of demand to the change in the variable. PεD = % Change in Quantity Demanded / % Change in Price In all cases, ignore the negative sign as this is not important. Numbers under 1 (ε < 1) are inelastic. Such products are oils and good that we need each day. Numbers above 1 (ε > 1) are elastic meaning that an increase in price will cause a significant fall in demand. If the number equals 1 (ε = 1) then it is unit elastic. In essence, if there is elastic demand, people will purchase less reducing the total revenue of a firm. The opposite will happen if there is inelastic demand as people will purchase almost the same amount as before and total revenue will increase. What Determines the PεD? First of all, the number and closeness of substitute goods. If there are many substitutes, it will be easier for consumers to switch to alternatives. Second, the proportion of income spent on goods is another factor. The higher the proportion, the more we will be force to cut consumption as the price rises. For example, for salt, even if the price rises, we would be willing to pay for it. But, if for example, interest rates increase, people will cut down on house purchases. Lastly, the time period also plays a part as people need to take the time to research substitutes. a) Perfect Elastic Demand: This is shown by a horizontal straight line. If price was to change, the demand would fall to zero. Remember, perfect elasticity intersects with the Y axis. b) Perfect Inelastic Demand: This is shown be a vertical straight line. No matter how the price changes, the demand will remain constant. The closest perfectly inelastic item is oil. c) Unit Elastic Demand / Constant...

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