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Demand
Elasticities of Demand
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Emil McCarthy
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Cards (17)
Elasticity
The
responsiveness
of one variable to a
change
in another
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Elasticity
of
Demand
The
responsiveness
of demand to a
change
in a factor which affects demand
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Price elasticity of demand (
PED
)
The %
change
in quantity demanded divided by the %
change
in price
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Income elasticity of
demand
(YED)
The %
change
in quantity demanded divided by the % change in
income
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Cross
elasticity
of
demand
(XED)
The % change in
quantity
demanded of Good A divided by the % change in the
price
of Good B
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Perfectly inelastic demand
The result of the calculation is zero.
The demand curve is a vertical line meaning that demand will not change even if there is an increase in another variable.
This is because the good is a necessity good with absolutely no substitute or no reasonable substitute.
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Inelastic demand
The result of the calculation is less than 1
The curve is going to be downward sloping with a steep slope
The good may be a necessity good which has a few reasonable substitutes. Hence demand may change but not by much
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Unitary
Elastic Demand
The result of the calculation is 1 or -1.
%change in demand = %change in the other variable.
The curve has a gradient of 40 degrees
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Elastic demand
The result of calculation is greater than one
That indicates that the %change in demand is greater than the % change in another variable.
It is downward sloping with a gentle slope.
Goods with Elastic demand are goods with many readily available substitutes.
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Perfectly elastic demand
The result of the calculation is
infinity
or
-infinity
Demand will change without another change in another variable.
The curve is a
horizontal
line.
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PED
(Price Elasticity of Demand)
+=
Giffen
(hype)
-=
Normal
good
YED(Income Elasticity of Demand)
+=
Normal
Good
-=
Inferior
Good
XED(Cross Elasticity of Demand)
+=Substitute Good
-=Complimentary
Good
Steps to Calculating Elasticity of Demand
Step1-Calculate(
new-old
)
Step2-Calculate(
change
/
old
)*100
Step3-Aplly the formula e.g %
Change
of Qd/%change of
price
PED
= Positive the
good
is a ....
and if it is negative, it is a
Giffen
for positive and Normal for negative
YED
if
positive
it is a
if
negative
it is a
Positive is noramal
Negative is
inferior
XED
if result is positive it is a and if it is negative it is a
Positive for
substitute
and Negative for
complimentary
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