The price elasticity of
demand (PED) is the
percentage change in the
quantity demanded divided by
the corresponding percentage
change in its price
PED = (% change in
quantity)/(% change in price)
Demand is elastic if the price
elasticity is more negative than
–1. Demand is inelastic if the
price elasticity lies between –1
and 0. If the demand elasticity
is exactly –1, demand is unit elastic.
The fallacy of composition
means that what is true for the
individual may not be true for
everyone together, and what is
true for everyone together may
not hold for the individual.
The short run is the period
after prices change but before
quantity adjustment can occur.
The long run is the period
needed for complete
adjustment to a price change.
Its length depends on the type
of adjustments consumers wish to see.
The cross-price elasticity of
demand for good i with respect
to changes in the price of good
j is the percentage change in
the quantity of good i
demanded, divided by the
corresponding percentage
change in the price of good j.
The budget share of a good is
its price times the quantity
demanded, divided by total
consumer spending or income.
The income elasticity of
demand for a good is the
percentage change in quantity
demanded divided by the
corresponding percentage
change in income.
A normal good has a positive
income elasticity of demand.
An
inferior good has a negative
income elasticity of demand.
A luxury good has an income
elasticity above unity.
A
necessity has an income
elasticity below unity.
The incidence of a tax
describes who eventually bears
the burden of it.
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