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Elasticity

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a measure of responsiveness of quality demanded or quality supplied (the percentage change in the quantity demanded or supplied)

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Formula of Elasticity of Demand

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% change in quantity demanded / % change in price

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standard method of computing the percentage of change

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(end value - start value/start value) x 100

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midpoint method formula

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(end value - start value / midpoint) x 100%

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price elasticity of demand formula

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(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]

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price elasticity is higher when

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a good has more close substitutes available

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narrowly defined goods

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higher elasticity

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broadly defined good

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lower elasticity

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Is price elasticity higher for luxuries or necessities?

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luxuries

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Is price elasticity higher for the short run or the long run?

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long run

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demand is elastic

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price elasticity of demand is > 1

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demand is inelastic

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price elasticity of demand < 1

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Demand has unit elasticity

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price elasticity of demand = 1

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Demand is perfectly inelastic when

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Price elasticity of demand = 0

Demand curve is vertical

Demand curve is vertical

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Demand is perfectly elastic

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Price elasticity of demand = infinity

Demand curve is horizontal

Demand curve is horizontal

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the flatter the demand curve

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the greater the price elasticity of demand

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total expenditure equation

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Price x Quantity

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total expenditure equals

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total revenue

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normal good

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income elasticity > 0 (as income increases quantity increases)

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inferior good

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income elasticity < (as income increases quantity decreases)

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income elasticity of demand

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a measure of how much the quantity demanded of a good responds to a change in consumers' income

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cross-price elasticity of demand

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a measure of how much the quantity demanded of one good responds to a change in the price of another good

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substitutes (cross price elasticity)

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positive

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complements (cross price elasticity)

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negative

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as quantity increases

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there is less elasticity of supply