How markets work - Elasticity and its application - The elasticity of demand
5 important questions on How markets work - Elasticity and its application - The elasticity of demand
What does the price elasticity of demand measure?
- How much the quantity demanded of a good, responds to a change in price > How buyers and sellers respond to changes in market conditions.
- It's calculated as the % change in quantity demanded divided by % change in price.
Because there is no universal rule for what determines a demand curve's elasticity, which factors usually influence the price elasticity of demand?
- Availability of close substitutes: goods with close substitutes have more elastic demand; consumers easily switch to substitutes.
- Necessities vs Luxuries: necessities have inelastic demands, luxuries have elastic demands.
- Definition of the Market: narrowly defined markets have more elastic demand because its easier to find close substitutes. Broad markets have more inelastic demand (no substitutes).
- Time Horizon: goods have more elastic demand over longer time periods
Why do economists use the concept of elasticity when studying markets and policy-making effects?
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What is the problem when calculating the price elasticity of demand? And which method can we use that avoids this problem?
- When calculating using the simple method, the price elasticity of demand from point A to point B, will turn out differently than from point B to point A. Even though they are the same thing.
- The midpoint method avoids this problem.
How does the midpoint method work when calculating the price elasticity of demand?
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