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2 Primary Determinants of the Price Elasticity of Demand
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-Number and availability of substitutes
Man substitutes - Demand is relatively price elastic
Few substitutes - Demand is relatively price inelastic
-Time
Short Run - Demand is relatively price inelastic
Long Run - Demand is relatively price elastic
Man substitutes - Demand is relatively price elastic
Few substitutes - Demand is relatively price inelastic
-Time
Short Run - Demand is relatively price inelastic
Long Run - Demand is relatively price elastic
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If the absolute value of elasticity is > 1:
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Demand is Elastic
Total Revenue will increase with a decease in price
Total Revenue will increase with a decease in price
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If the absolute value of elasticity is < 1:
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Demand is Inelastic
Total Revenue will decrease with a decrease in price
Total Revenue will decrease with a decrease in price
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If the absolute value of elasticity is = 1:
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Demand is unitary elastic (total revenue will not change significantly with a small change in price)
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Price elasticity of supply:
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Measures how responsive a firm can be when market price changes
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