Chapter 6 - Extensions of Demand and Supply Analysis

# Chapter 6 - Extensions of Demand and Supply Analysis -...

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Economics 212 Principles of Microeconomics

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Chapter 6 Extensions of Demand and Supply Analysis
I. Price Elasticity of Demand A. The Law of Demand tells us that consumers will respond to a price decline by buying more of a product (ceteris paribus), but it does not tell by how much. B. The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand

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1. elastic demand - consumers are relatively responsive to price changes (restaurant meals) 2. inelastic demand - consumers are relatively unresponsive to price changes (cigarettes, milk)
3. For both elastic and inelastic demand 1. Consumers behave according to the Law of Demand 2. Describe the degree of responsiveness to price changes

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A. Price elasticity of demand formula 1. E d = % change in quantity % change in price or E d = (change in Q/Q) (change in P/P)
1. It is important to use the percentage (%) rather than absolute changes a. Absolute changes depend on the choice of units. (i.e. a change in Price from \$2 to \$1 could be stated as a change of 1 unit if we use dollars or 100 units if expressed in cents)

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b. Percent also makes it possible to compare E d for different products. (i.e. \$10,000 car whose price rises by \$1, and for a \$1 candy bar whose price rises by \$1.)
2. Because of the inverse relationship between price and quantity demanded, the actual E d will be a negative value. So the absolute value must be used.

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3. If: a. E d > 1, then demand is elastic (price responsive) - a % change in price results in a larger % change in quantity demanded
b. E d < 1, then demand is inelastic (price unresponsive) -a % change in price is accompanied by a smaller % change in quantity demanded

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c. E d = 1, then demand is unitary elastic -a % change in price and the % change in quantity demanded are equal
4.

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