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is a measure of behaviors by producers and consumers in response to changes in price.
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That concept is called elasticity (more specifically, price elasticity). It measures how responsive quantity demanded or supplied is to a change in price.
Key points:
- Price elasticity of demand (PED) = % change in quantity demanded ÷ % change in price.
- Price elasticity of supply (PES) = % change in quantity supplied ÷ % change in price.
- Interpretation: elasticity > 1 = elastic (responsive); elasticity < 1 = inelastic (not very responsive); elasticity = 1 = unitary responsiveness.
- Determinants of demand elasticity: availability of substitutes, necessity vs luxury, share of income, time horizon, market definition.
- Determinants of supply elasticity: time to adjust, flexibility of production, availability of inputs, stock levels.
Example: If price rises 10% and quantity demanded falls 20%, PED = −2 (elastic).
Key points:
- Price elasticity of demand (PED) = % change in quantity demanded ÷ % change in price.
- Price elasticity of supply (PES) = % change in quantity supplied ÷ % change in price.
- Interpretation: elasticity > 1 = elastic (responsive); elasticity < 1 = inelastic (not very responsive); elasticity = 1 = unitary responsiveness.
- Determinants of demand elasticity: availability of substitutes, necessity vs luxury, share of income, time horizon, market definition.
- Determinants of supply elasticity: time to adjust, flexibility of production, availability of inputs, stock levels.
Example: If price rises 10% and quantity demanded falls 20%, PED = −2 (elastic).
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