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Elasticity and linear demand
Please re-word the following into your own words and include some examples. Its a respond to the question, Explain why the price elasticity of demand varies along a demand curve, even if the demand curve is linear.
As we move down a demand curve, the percentage change in price (quantity) varies. When price is relatively high, a one unit change in price is small in percentage terms. When price is relative low, a one unit change is much higher as a percent of the price. The same is true for quantity demanded. Given the inverse relationship between price and quantity along a demand curve and the formula for calculating elasticity, as we move down a demand curve, percentage change in price increases and the corresponding percentage change in quantity demanded increases, causing the ratio of the two to get smaller in absolute terms.
Create another diagram; once again start from an initial macroeconomic equilibrium. Explain both the SR and LR impact of a contractionary AS shock on Y. Use the appropriate diagrams and provide a brief real world example of this type of shock.
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