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Elasticities

A Perfectly Elastic Demand Curve is horizontal. One way to remember this is to think of an imaginary 'e' for elastic when drawing your graph like so:





















A Perfectly Inelastic Demand Curve is vertical. A similar method to remember this is to draw a dot above the curve to resemble an 'i' for inelastic:






















For the different elasticity formulas %Change in QD always goes on top (the numerator).
Remember that:
PED = %Change in QD / %Change in Price
YED = %Change in QD / %Change in Income
XED = %Change in QD for Good A / %Change in Price for Good B

For XED if the result is positive then the good is a substitue; if not (hence its negative) then the good is complimentary.
For PED is the result is between 0 and -1 it is inelastic, if it is less than -1 then the good is elastic.
For YED is the result is negative then the good is inferior, if the result is positive then it is either a normal good, or if it is very positive it is a luxury good.

You also need to remember the percentage change formula:
Percentage Change = Change/Original * 100

Rememeber there are 3 different elasticities on the demand curve. The portion of the demand curve which touches the x axis if inelastic, and the portion which touches the y axis is elastic. The point of unit elasticity is where marginal revenue = 0 and where total revenue is maximised.


































Page last updated on 20/10/13
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