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Unformatted text preview: ELASTICITY Economists use the term elasticity to refer to market reaction to a change . At the principles level, texts will speak of price elasticity of Demand and Supply, of income elasticity of Demand, and of crossprice elasticity of Demand. In each of these cases, the phenomenon involved is the intensity of response to a given change. The most commonly studied of these elasticities is price elasticity. Demand and Supply are considered price elastic if the change in quantity Demanded (or Supplied) overwhelms the change in price which triggered it. For example, if a retailer tries raising price a measly 10% and discovers that as a consequence sales have fallen off by over 50%, that retailer must deal with the fact that Demand for that product is quite price elastic; consumers are very sensitive to price changes and respond aggressively by cutting purchases a lot when price is raised only a little. On the other hand, if (as gas station owners realize) a retailer raises price 10% and finds that sales barely decline at all (maybe, max, a 1% decline in the number of cars coming in to fill up), then that retailer faces price inelastic Demand. Consumers have to buy the product, and for most of them, a higher price is not that much of a deterrent. Every few months we all watch the price of gas at our favorite gas stations rise by one or two cents a week. I still go faithfully once a week and fill up. My Demand for gas to operate my car is price inelastic; price changes have almost no impact on the quantity of gas I purchase. On the other hand, when the price of shoes at my favorite cutprice shoe store falls from $15 to $10 (a 33% drop), I tend to buy twice as many pairs (two pairs instead of 1, a 100% increase). My Demand for shoes tends to be quite sensitive to price changes; drop the price and I lose all common sense. The degree to which Demand is price elastic can be determined two different ways: by computing the coefficient of price elasticity, and by determining the impact of price changes on the firm's total revenue. Price elasticity of Supply can only be determined by computing the coefficient. HOW TO COMPUTE THE COEFFICIENT OF PRICE ELASTICITY, USING THE MIDPOINTS FORMULA. (using the midpoints formula means you get the same coefficient value whether the change involves a price increase or decrease.) the coefficient = the % change in quantity divided by the % change in price [do not worry about +s and s  all we want is the "absolute" value, the numerical result of the calculations]...
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This note was uploaded on 04/14/2008 for the course ECONOMICS 10223 taught by Professor Biery during the Fall '07 term at TCU.
 Fall '07
 Biery
 Income Elasticity, Price Elasticity

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