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Elasticity Definition and Useful Applications

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Price Elasticity of Demand Ratio of Percentage Change in Quantity Demanded to Percentage Change in Price

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Types of Elasticity Inelastic -- Percentage change in quantity demanded less than percentage change in price. Numerical value between 0 and -1 Elastic -- Percentage changes in quantity demanded exceeds the percentage change in price. Absolute value greater than 1 Unitary Elasticity - Numerical value equals 1.

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Rank Elasticities uBeef uSalt uEuropean vacation uSteak uHonda Accord uDijon mustard

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Factors Affecting Elasticity of Demand Availability of Substitutes Fraction of Income Spent on Good Adjustment Time

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Perfectly Elastic

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Perfectly Inelastic

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Elasticity vs Slope

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Slope = P/ Q=-2 Elasticity at P=1 %DQ=(4.5-4)/4.25 %DP=(1-2)/1.5 %DQ/%DP=-.177 Elasticity at P=6 %DQ=(2-1.5)/1.75 %DP=(6-7)/6.5 %DQ/%DP=-1.86 Elasticity changes along the demand curve Unitary elasticity between P=4 and P=5 Above point of unitary elasticity, demand is elastic Below point of unitary elasticity, demand is inelastic

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Revenue and Elasticity

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Total Revenue

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Elasticity of Supply Ratio of Percentage Change in Quantity Supplied to Percentage Change in Price

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Ranking Supply Elasticities uRental Housing (short run) uRetail sales clerks uComputer programmers uTiger Woods uCompact Discs

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Chapter 4 Elasticities McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Chapter 4 Elasticities McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

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