elastisity
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ElasticitiesKanako Nakagawa
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Price Elasticity of Demand
Price Elasticity of Demand (PED): a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
PED = (% change in quantity demanded) / (% change in price) Elastic demand: a change in the price of a good or service
will cause a proportionately larger change in the quantity demanded.
Inelastic demand: a change in the price of a good or service will cause a proportionately smaller change in quantity demanded.
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Price Elastic DemandPri
ce
QuantityQ1
P1
P2
Q2
PED>1
D
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Price Inelastic DemandPri
ce
QuantityQ1
P1
P2
Q2
PED<1
D
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Perfectly Elastic DemandPri
ce
Quantity
P1
PED=infinity
D
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Perfectly Inelastic Demand
Pri
ce
QuantityQ1
PED=0
D
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Cross Elasticity of Demand
Cross Elasticity of Demand (XED): a measure of the responsiveness of the demand for a good or service to a change in the price of a related good.
XED = (% change in quantity demanded for X) / (% change in price of Y) Substitute goods: goods that can be used instead of each
other, such as pepsi and coke. They have positive XED Complement goods: goods which are used together, such
as oreo and milk. They have negative XED.
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Income Elasticity of Demand
Income Elasticity of Demand (YED) a measure of the responsiveness of demand for a good to change in income.
YED = (% change in quantity demanded) / (% change in income) Normal good: has a positive YED. As income rises,
demand increases. Inferior good: has a negative YED. As income rises,
demand decreases.
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Price Elasticity of Supply
Price Elasticity of Supple (PES): a measure of the responsiveness of the quantity supplied of a good or service to a change in its price.
PES = (% change in quantity supplied) / (% change in price)
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Tax
Indirect tax: an expenditure tax on a good or service. An indirect tax is shown on a supply and demand diagram as an upward shift in the supply curve, where the vertical distance between the two supply curves represents the amount of tax.
Specific tax: shown as a parallel shift.
Ad Valorem tax: shown as a divergent shift.
Incidence (burden): incidence of a tax is the amount of tax paid by the producer/consumer. If the demand for a good is inelastic the greater incidence of the tax falls on the consumer. If the demand for a good is elastic, the greater incidence of the tax falls on the producer.