ch05lectureS

ch05lectureS - Elasticities of Demand and Supply CHAPTER5...

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1 Elasticities of Demand and Supply CHAPTER 5 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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2 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 changes when the price of the good changes. To determine the price elasticity of demand, we compare the percentage change in the quantity demanded with the percentage change in price. 5.1 THE PRICE ELASTICITY OF DEMAND ± Percentage Change in Price Percent change in price = New price – Initial price Initial Price x 100 Percent change in price = $5 – $3 $3 x 100 = 66.67 percent Suppose Starbucks raises the price of a latte from $3 to $5 a cup. What is the percentage change in price? 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 Initial Price x 100 Percent change in price = $3 – $5 $5 x 100 = – 40 percent
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3 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. We use the average of the initial price and the new price to measure the percentage change. 5.1 THE PRICE ELASTICITY OF DEMAND The Midpoint Method x 100 Percent change in price = New price – Initial price (New Price + Initial Price) ÷ 2 To calculate the percentage change in the price divide 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. 5.1 THE PRICE ELASTICITY OF DEMAND The percentage change in price calculated by the midpoint method is the same for a price rise and a price fall. x 100 Percent change in price = $5 – $3 ($5 + $3) ÷ 2 Percent change in price = 50 percent
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4 5.1 THE PRICE ELASTICITY OF DEMAND ± Percentage Change in Quantity Demanded x 100 Percent change in quantity = New quantity – Initial quantity (New quantity + Initial quantity) ÷ 2 x 100 Percent change in quantity = $5 – $15 ($5 + $15) ÷ 2 = – 100 Percent If Starbucks raises the price of a latte, the quantity of latte demanded decreases. 5.1 THE PRICE ELASTICITY OF DEMAND When the price rises , the quantity demanded decreases along the demand curve. Similarly, when the price falls , the quantity demanded increases along the demand curve.
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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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ch05lectureS - Elasticities of Demand and Supply CHAPTER5...

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