chapterfour

chapterfour - Ch. 4 Elasticity Price Elasticity of Demand -...

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Price Elasticity of Demand - Price of elasticity of demand : a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same. - Calculating Price Elasticity of Demand o Price elasticity of demand = Percentage change in quantity demanded Percentage change in price o To use this formula, we need to know the quantities demanded at different prices when all other influences on buyers’ plans remain the same. o Express the changes in price and quantity demanded as percentages of the average price and the average quantity . By using the avg price and avg quantity, we calculate elasticity at a point on the demand curve midway between the original point and the new point. o Percentage change in quantity demanded = change in Q/ avg Q o Percentage change in price = change in P/ avg P o We use average price and average quantity because it gives the most precise measurement of elasticity. Thus, we get the same value for the elasticity regardless of whether the price rises or falls the same amount. - Elasticity is the ratio of two percentage changes. - Elasticity is a units-free measure because the percentage change in each variable is independent of the units in which the variable is measured. The ratio of two percentages is a number without units. - When the price of a good rises, the quantity demanded decreases along the demand curve. Because a positive change in price brings a negative change in the quantity demanded, the price elasticity of demand is a negative number. But it is the magnitude, or absolute value, of the price elasticity of demand that tells us how responsive – how elastic – demand is. - Perfectly inelastic demand : The quantity demanded remains constant when the price changes; the price elasticity of demand is zero. Graph: Vertical line. Ex: Insulin. - Unit elastic demand : The percentage change in the quantity demanded equals the percentage change in price; the price elasticity equals 1. Graph: Hyperbolic Curve in First Quadrant - Between perfectly inelastic demand and unit elastic demand, the general case is in which the percentage change in the quantity demanded is less than the percentage change in price; the price elasticity of demand is between zero and 1. The good has inelastic demand : Ex: Food and housing - Perfectly elastic demand : The quantity demanded changes by an infinitely large percentage in response to a tiny price change; the price elasticity of demand is infinite. Ex: Same products, same price, side-by-side - Between unit elastic demand and perfectly elastic demand, in which the percentage change in quantity demanded exceeds the percentage change in price, the price elasticity of demand is greater than 1 and the good is said to have an elastic demand . Ex: Automobiles and furniture
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This note was uploaded on 02/17/2008 for the course ECON 51 taught by Professor Leachman during the Spring '08 term at Duke.

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chapterfour - Ch. 4 Elasticity Price Elasticity of Demand -...

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