Elasticity= percentage change in quantity demanded/percentage in price
Example: own price elasticity of demanded for apples
Price initial 1.5 dollars/lb quantity initial 6lb
Price final 2.0 bucks/lb quantity final 2lb
Elasticity: (2-6)/2 / (2-1.5)/1.5 = 2 absolute value
quantity demanded is twice the change of price change
If the absolute value of elasticity is less than 1, customers are inelastic to the change of price (insensitive)
If the absolute value of elasticity is larger than 1, customers are elastic to the change of price (sensitive)
What impacts elasticity:
(1)Time
Short run & long run
In the short run, both customers and suppliers can not respond to the change instantaneously, so their behavior will be inelastic
In the long run, elasticity will be larger
(2)Budget
If a product only consists of a small proportion of your budget, a change in the price won't change your behavior much, but if it change to a certain price, you may quit the market.
(3) Substitutes
If a product has a lot of substitutes, the rise of price will lead to less consumption.
Elasticity in pictures
If the slope is flat, elastic
If the slope is steep, inelastic
The more narrowly you define a product, you open up the possible substitute you will have. So compare with the elasticity of minivan, Ford minivan and red Ford minivan, the last one is the highest.
Firm behavior: if firm raise the price of an elastic product, they will lose total revenue
If the firm raise the price of an inelastic product, they will gain total revenue.
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