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Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones then your elasticity of demand would be calculated as:
(10 8) 22 percent (10 8) / 2 2.32 (2.20 2.00) 9.5 percent (2.00 2.20) / 2
Ranges of Elasticity
Inelastic Demand
Percentage change in price is greater than percentage change in quantity demand. Price elasticity of demand is less than one.
Elastic Demand
Percentage change in quantity demand is greater than percentage change in price. Price elasticity of demand is greater than one.
Demand
$5 1. An increase in price... 4
Inelastic Demand
- Elasticity is less than 1
Price
Elastic Demand
- Elasticity is greater than 1
Price
Demand
Q&A
On Tuesday, price and quantity demanded are INR 7 and 120 units, respectively. Ten days later, price and quantity are INR 5 and 150 units, respectively. What is the price elasticity of demand between the price of INR 5 and INR 7? What does the price elasticity of demand calculated figure indicate?
TR = P x Q
$4
P x Q = $400
P
(total revenue)
Demand
100
Quantity
Income Elasticity
- Types of Goods Normal Goods Income Elasticity is positive. Inferior Goods Income Elasticity is negative.
Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.
FACTOR SUBSTITUTION
If capital and labour resources are occupationally mobile and substitutable then the elasticity of supply for a product is likely to be higher than if capital equipment and labour cannot easily be switched and the production process is fairly inflexible in response to changes in the pattern of demand for goods and services. TIME PERIOD Supply is likely to be more elastic, the longer the time period a firm has to adjust its production. In the short run, the firm may not be able to change its factor inputs.
A tax placed on the sellers of VCR tapes shifts the supply curve from S1 to S2 and raises the equilibrium price from $8 to $8.50. Part of the tax is paid by buyers through a higher price paid, and part of the tax is paid by sellers through a lower price kept. Tax revenues are maximized by placing the tax on the seller who faces the more inelastic demand curve.
Q&A
Why will government raise more tax revenue if it applies a tax to a good with inelastic demand than if it applies the tax to a good with elastic demand? Under what condition would a per-unit tax placed on the sellers of computers be fully paid by the buyers of computers?