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Elasticity
I. Introduction A. Elasticity Defined

Elasticity: Elasticity is a measure of the responsiveness of the quantity demanded or quantity supplied to one of their respective determinants (i.e. price, price of related goods, income, etc.)

B. Key word: responsiveness A synonym for elasticity would be responsiveness (i.e. how responsive supply or demand is to changes in price, price of related goods, income, etc.) C. Four measures of elasticity 1. Price elasticity of demand 2. Income elasticity of demand 3. Cross price elasticity of demand 4. Price elasticity of supply
II. Price Elasticity of Demand A. Definition

Price Elasticity of Demand is a measure of how much the quantity demanded of good responds to a change in the price of that good.

B. Formula [pic] this value is normally negative. Notes: • Since the demand curve is downward sloping the above fraction will have a negative value. To change the negative value into a positive value the absolute value is taken. • Elasticity is different from slope. Slope is measured by ∆QD/∆P C. Five Classifications 1. Perfectly inelastic demand does not change [pic]

% change in QD = 0

2. Inelastic demand little change [pic]

% change in QD < % change in P

3. Unit elastic demand [pic]

% change in QD = % change in P

The only way it can be equal to one is if its curve linear.

4. Elastic demand [pic]

% change in QD > % change in P

5. Perfectly elastic demand [pic]

% change in P = 0

III. Income Elasticity of Demand A. Definition

Income Elasticity of Demand is a measure of how much the quantity demanded of good responds to a change in the income of consumers.

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