Elasticity

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Elasticity
MEASURE OF RESPONSIVENESS OF QUANTITY DEMANDED OF A GOOD TO A CHANGE IN SOME VARIABLE
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Price Elasticity of Demand (PED)
MEASURES PROPORTIONATE CHANGE IN QUANTITY DEMANDED FOR A GOOD CAUSED BY THE PROPORTIONATE CHANGE IN THE PRICE OF THE GOOD ITSELFFORMULA:     TOTAL QUANTITY   X       PRICE 1 + PRICE 2                  TOTAL PRICE         QUANTITY 1 + QUANTITY 2RESULT: > 1 = ELASTIC - PRICE INCREASE = DEMAND DECREASE  - PRICE INCREASE = TOTAL REVENUE DECREASE < 1 = INELASTIC - P. INREASE = LITTLE CHANGE - P. INCREASE = TR INCREASE = 1 = UNITARY ELASTIC - P. INCREASE 10% = DEMAND DECREASE 10% - P. INCREACE = TR DECREASE O  = PERFECTLY INELASTIC - P.INCREASE = NO CHANGE INFINITY = PERFECTLY ELASTIC - P. INCREASE = DEMAND -> O NEGATICE RESULT: OBEYS LAWS OF DEMAND POSITIVE RESULT: DOESN'T OBEY LAWS OF DEMAND, EG. GIFFEN GOOD

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FACTORS AFFECTING PED
SUBSTITUTE GOODS - MORE SUBSTITUTES = GREATER ELASTICITY COMPLEMENTARY GOODS - CHEAPER OF GOODS =INELASTIC LUXURY GOODS = ELASTIC NECESSITIES = INELASTIC BRAND LOYALTY = INELATIC DURABILITY - PRICE INCREASES, EXTEND LIFE OF CURRENT MODEL = ELASTIC

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