Ch5___Elasticity__Handouts_

Ch5___Elasticity__Handouts_ - Elasticities of Demand and S...

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Elasticities of Demand nd S ppl CHAPTER 5 and Supply 1
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Oil Market ± Why couldn’t oil producers simply raise prices? ± What was their motivation to cut output? ± Why is volume important to their calculations? 2
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C H A P T E R C H E C K L I S T When you have completed your study of this chapter, you will be able to 1 Define, explain the factors that influence, and calculate the price elasticity of demand. 2 Define, explain the factors that influence, and calculate the price elasticity of supply. 3 Define and explain the factors that influence the cross elasticity of demand and the income elasticity of demand.
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5.1 THE PRICE ELASTICITY OF DEMAND Price elasticity of demand is a measure of the extent to which the quantity demanded of a good hanges when the price of the good changes changes when the price of the good changes. To determine the price elasticity of demand, we ompare the percentage change in the quantity compare the percentage change in the quantity demanded with the percentage change in price. 4
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5.1 THE PRICE ELASTICITY OF DEMAND ± Percentage Change in Price Suppose Starbucks raises the price of a latte from $3 ew price itial price pp p$ to $5 a cup. What is the percentage change in price? Percent change in price = New price – Initial price Initial Price x 100 Percent change in price = $5 – $3 x 100 = 66.67 percent $3 5
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5.1 THE PRICE ELASTICITY OF DEMAND Suppose Starbucks cuts the price of a latte from $5 to $3 a cup. What is the percentage change in price? Percent change in price = New price – Initial price itial Price x 100 Initial Price Percent change in price = $3 – $5 $5 x 100 = – 40 percent 6
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5.1 THE PRICE ELASTICITY OF DEMAND The same price change, $2, over the same interval, $3 to $5, is a different percentage change depending on whether the price rises or falls. We need a measure of percentage change that does not depend on the direction of the price change. e use the average of the initial price and the new We use the average of the initial price and the new price to measure the percentage change. 7
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5.1 THE PRICE ELASTICITY OF DEMAND The Midpoint Method To calculate the percentage change in the price divide e change in the price by the verage rice and then the change in the price by the average price and then multiply by 100. The average price is at the midpoint between the initial price and the new price, hence the name midpoint method.
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This note was uploaded on 03/24/2009 for the course ECON 101 taught by Professor Balaban during the Spring '07 term at UNC.

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Ch5___Elasticity__Handouts_ - Elasticities of Demand and S...

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