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caused by a determinant other than price. MODULO BASIC MICROECONOMICS Elasticity The concept of elasticity is concerned with the responsiveness of quantity demanded or quantity supplied to a change in price. If a small change in price brings about a massive change in quantity demanded, the price elasticity of demand is said to be highly elastic. Conversely, if a change in price has little or no effect on the quantity demanded, the demand is said to be highly inelastic. This concept is obviously very important to producers, who have to estimate the potential effects of their pricing strategies over time. It is also important to government finance departments, which have to model the implications of imposing sales taxes on goods and services in order to predict tax revenues. Price elasticity of demand is measured by dividing the change in quantity demanded by the change in price and, conversely, price elasticity of supply is measured by dividing the change in quantity supplied by the change in price. Price elasticity of demand occurs when an increase in price leads to a reduction in total revenue (p x q) between those two points on the demand curve, and price inelasticity occurs when an increase in price leads to an increase in total revenue. Unitary elasticity occurs when the change in price causes no change in total revenue. In addition to price elasticity, there are similar concepts of relevance to your study: Income elasticity is the responsiveness of quantity demanded or supplied to a change in income. Cross elasticity is the responsiveness of quantity demanded or supplied of good X to a change in price of good Y. Equilibrium Assuming all determinants of supply and dernand are to be constant except price, a firm will produce where the supply curve intersects the demand curve. By definition, this is the point at which the quantity supplied equals the quantity demanded (Figure 3). Price is determined at the intersection of the supply and demand curves If the price is set above the equilibrium price, this will result in the quantity supplied