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The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. When demand is inelastic a price elasticity less than 1a price increase raises total revenue, and a price decrease reduces total revenue.
When demand is elastic a price elasticity greater than 1a price increase reduces total revenue, and a price decrease increases total revenue. When demand is unit elastic a price elasticity equal to 1a change in price does not affect total revenue.
The price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.
The price elasticity of supply might be different in the long run than in the short run because over short periods of time, firms cannot easily change the sizes of their factories to make more or less of a good.
Thus, in the short run, the quantity supplied is not very responsive to the price. However, mankow longer periods, firms can build new factories, expand existing factories, close old factories, or they can enter or exit a market.
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So, in the long run, the quantity supplied can respond substantially to a change in price. A drought that destroys half of all farm crops could be good for farmers at least those unaffected by the drought if the econmia for the crops is inelastic.
The shift to the left of the supply curve leads to a price increase that will raise total revenue if the price elasticity of demand is less than 1. No one farmer would have an incentive to destroy his crops in the absence of a drought because he takes the market price as given.
Only if all farmers destroyed a portion of their crops together, for example through a government program, would this plan work to make farmers better off. Manmiw for Review 1. The price elasticity of demand measures how much quantity demanded responds to a change in price. The economai elasticity of demand measures how much quantity demanded responds to changes in consumer income.
The determinants of the price elasticity of demand include how available close substitutes are, whether the good is a necessity or a luxury, how broadly defined the market is, and the time horizon. Luxury goods have greater price elasticities than necessities, goods with close substitutes have greater elasticities, goods in more narrowly defined markets have greater elasticities, and the elasticity of demand is greater the longer the time horizon.
The main advantage of using the mid-point formula is that it uses a constant base whether the change in price or quantity demanded is an increase or a decrease. An elasticity greater than one means that demand is elastic.
When the elasticity is greater than one, the percentage change in quantity demanded exceeds the percentage change in price. When the elasticity equals zero, demand is perfectly inelastic. There is no change in quantity demanded when there is a change in price.
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Figure 1 presents a supply-and-demand diagram, showing the equilibrium price, the equilibrium quantity, and the total revenue received by producers. Evonomia revenue equals the equilibrium price times the equilibrium quantity, which is the area of the rectangle shown in the figure. If demand is elastic, an increase in price reduces total revenue. With elastic demand, the quantity demanded falls by a greater percentage than the price rises.
As a result, total revenue declines. A good with income elasticity less than zero is called an inferior good because as income rises, the quantity demanded declines.
The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. It measures how much quantity supplied responds to changes in price. The price elasticity of supply of Picasso paintings is zero, because no matter how high econo,ia rises, no more can ever be produced. The price elasticity of supply is usually larger in the long run than it is in the short run.
Over short periods nankiw time, firms cannot easily change the sizes of their factories to make more or less of a good, so the quantity supplied is not very responsive to price. Over longer periods, firms can build new factories or close old ones, so the quantity supplied is more responsive to price. Because the demand for drugs is likely to be inelastic, an increase in price will lead to a dconomia in total expenditure.
Therefore, drug users may resort to theft or burglary to support their habits. Mystery novels have more elastic demand mankie required textbooks, because mystery novels have close substitutes and are a luxury good, while required textbooks are a necessity with no close substitutes. If the price of mystery novels were to rise, readers could substitute other types of novels, or buy fewer novels altogether. But if the price of required textbooks were to rise, students would have little choice but to pay the econoima price.
Thus, the quantity demanded of required textbooks is less responsive to price than the quantity demanded of mystery novels. Beethoven recordings have more elastic demand than classical music recordings in general.
Beethoven recordings are a narrower market than classical music recordings, so it is introdkcao to find close substitutes for them. If the price of Beethoven recordings were to rise, people could substitute other classical recordings, like Mozart. But if the price of all classical recordings were to rise, substitution would be more difficult.
A transition from classical music to rap is unlikely! Thus, intrlducao quantity demanded of classical recordings is less responsive to price than the quantity demanded of Beethoven recordings.
Subway rides during the next five years have more elastic demand than subway rides during the next six months. Goods have a more elastic demand over longer time horizons. If the fare for a subway introdicao was to rise temporarily, introfucao could not switch to other forms of transportation without great expense or great inconvenience. But if the fare for a subway ride was to remain high ceonomia a long time, people would gradually switch to alternative forms of transportation.
As a result, the quantity demanded of subway rides during the next six months will be less responsive to changes in the price than the quantity demanded of subway rides during the next five years. Root beer has more elastic demand than water. Root beer is a luxury with close substitutes, while water is a necessity with no close substitutes. If the price of water manikw to rise, consumers have little choice but to pay the higher price.
But if the price of root beer were to rise, consumers could easily switch to other sodas. So the quantity demanded of root beer is more responsive to changes in price than the quantity demanded of water.
The price elasticity of demand for vacationers is higher than the.