Chapter Five: Elasticity and its application (Level
of difficulty 2 ½)
Elasticity refers to how sensitive quantity demanded
is to a change in price. Considering that the relationship between price and
demand is the following, if the price goes up then the demand for that good
goes down. Inelastic demand shows that although the price may rise there is
only a small quantity of the demand that decreases. The same way that if the
prices may lower, there is only a little bit of increase in the quantity
demanded. This may occur because there aren’t many substitutes to that certain
good; the good is a basic necessity, or |% of change in quantity/ %change in
price| with a coefficient that is less than one. Demand curves for inelasticity are steeper
than the demand curves for elasticity. Elasticity on the other hand must
contain a coefficient that is greater than one. When the coefficient is exactly
one, then that is considered to be ‘unit elastic demand’. Perfect inelastic
means that the found change percentages equal zero, shown by a vertical curve
in demand. Perfectly elastic represent that the found change percentages equal
infinity, and are determined by a horizontal curve in demand. The changes in
total revenue because of the change in price determined due to whether a good
is inelastic or elastic is total revenue. The price times the quantity.
Inelastic relationships mean that if the price rises so does total revenue,
price drops then total revenue does as well. Elastic relationships on the other
hand show that if a price rises then the total revenue goes down, and if the
price drops then the total revenue rises. Cross price elasticity of demand
measures how the quantity of demanded of one good responds to a change in
demand for the other. While the elasticity supply measures how much the
quantity supplied results in the change of price.
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