Ch04 - Chapter 4 Elasticity I Price Elasticity of Demand A...

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C h a p t e r 4 : E l a s t i c i t y I. Price Elasticity of Demand A. Figure 4.1 shows how the demand curve influences the price and quantity responses that result from a given change in supply. The figure highlights the need for a measure of the responsiveness of the quantity demanded to a price change. B. The price elasticity of demand is 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. C. Calculating Elasticity 1. The price elasticity of demand is equal to price in change Percentage demanded quantity in change Percentage . 2. To calculate the price elasticity of demand, we express the change in price as a percentage of the average price— the midpoint between the initial and new price . 3. Similarly we express the change in the quantity demanded as a percentage of the average quantity demanded—the average of the initial and new quantity. 4. Figure 4.2 shows what is needed to calculate the price elasticity of demand for pizza: The percentage change in quantity demanded is % Q , and the percentage change in price is % P . We calculate % Q as Q / Q ave and we calculate % P as P / P ave so we calculate the price elasticity of demand as ( Q / Q ave )/( P / P ave ). a) By using the average price and average quantity , the elasticity is the same value whether the price rises or falls. b) The ratio of two proportionate changes is the same as the ratio of two percentage changes. The measure is “units-free” because it is a ratio of two percentage changes and the percentages cancel out. Changing the units of measurement of price or quantity leave the value of the elasticity the same. c) The demand elasticity formula yields a negative value, because price and quantity move in opposite directions. However, it is the magnitude , or absolute value, of the measure that reveals how responsive the quantity change has been to a price change. So we use the magnitude or the absolute value of the price elasticity of demand. D. Inelastic and Elastic Demand Demand can be inelastic, unit elastic, or elastic, and can range from zero to infinity. 1.
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Fall '08 term at Temple.

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Ch04 - Chapter 4 Elasticity I Price Elasticity of Demand A...

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