Ch 5 - Elasticity, Taxation, and Consumer Choice

(Microeconomics)

* The **law of demand** stresses that consumers will buy more of a product in the case when price falls and demand will decrease if the price decreases
* This could be better understood by comprehending **elasticity**, which analyses the responsiveness of consumers and producers as a change of price occurs

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### @@**Elasticity of Demand**@@

* Elasticity is the measure of how consumers respond to changes in price
* The main and basic rule of elasticity is that a price change leads to a large change in quantity demanded, which is relative to the price change

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* Formula:
* **Price Elasticity of Demand (Ed)** = % change in Quantity Demanded (Qd) / % change in Price (P)
* The __percentage change__ in Price or Qd is calculated by using this formula: Change in P or Qd / Initial P or Qd
* Another way to calculate the percentage change is by taking the new number minus the old divided by the old number. This can be denoted by: N - OOO (New - Old Over Old)
* The point of using this formula is to find the type of elasticity, which is represented by values.

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### @@**Total Revenues Test to Determine Elasticity**@@

| ^^Type of Elasticity^^ | ^^Elasticity Value^^ |
|----|----|
| Perfectly Inelastic | = 0 |
| Unit Elastic | = 1 |
| Relatively Inelastic | < 1 |
| Relatively Elastic | > 1 |
| Perfectly Elastic | Infinity |

* }}**Tips for finding the elasticity value**:}}


1. Find the difference between the Demand and Price
2. Add the original numbers, then divide by 2 to find their midpoint
3. Divide the difference of both demand and price by the new midpoint number found in step 2
4. Divide the answer for demand by price
5. Check the type of elasticity based on the answer given in step 4

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* Now we know how to find the value of elasticity, however, what is the purpose of understanding elasticity?
* It is important for firms as it affects their revenue and profits. Total revenue is the amount of money received from sales of a product
* Equation: TR = P \* Q
* Total revenue = Price \* Quantity

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### @@**Perfect Elasticity**@@

* If the price increases and total revenue decreases, elasticity of demand is relatively elastic
* If price increases and total revenue increases, elasticity of demand is relatively inelastic
* If price changes and total revenue remains the same, elasticity of demand is unit elastic
* As price changes, the change in quantity demanded is infinite, and the elasticity of demand is perfectly elastic

| ^^Types of Elasticity^^ | ^^Relationship between Price and Total Revenue^^ |
|:---:|----|
| >1, Relatively elastic | P and TR are inversely related |
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