Ch04 - Chapter 4: Elasticity Objectives: Define, calculate,...

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Chapter 4: Elasticity Objectives: Define, calculate, and explain the factors that influence the price elasticity of demand Define, calculate, and explain the factors that influence the cross elasticity of demand and the income elasticity of demand Define, calculate, and explain the factors that influence the elasticity of supply
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When Prices Tumble, Does Revenue Grow? The personal computer industry is operating in fiercely competitive conditions. The prices of notebook have fallen to less than $1,000. The prices of desktops have fallen to less than $500. How did the revenues of computer producers change? Might revenue still grow? If you were running your own company, and you wanted to increase revenue, would you increase your price or decrease your price? The concept of elasticity helps to answer these questions.
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Price Elasticity of Demand In Figure 4.1(a), an increase in supply brings A large fall in price A small increase in the quantity demanded Revenue falls
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In Figure 4.1(b), an increase in supply brings A small fall in price A large increase in the quantity demanded Revenue increases Price Elasticity of Demand
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The contrast between the two outcomes in Figure 4.1 highlights the need for A measure of the responsiveness of the quantity demanded to a price change. 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. Price Elasticity of Demand
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Price Elasticity of Demand Calculating Elasticity The price elasticity of demand is calculated by using the formula: Percentage change in quantity demanded Percentage change in price
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Price Elasticity of Demand To calculate the price elasticity of demand using the mid-point formula: We express the change in price as a percentage of the average price— the average of the initial and new price, and we express the change in the quantity demanded as a percentage of the average quantity demanded— the average of the initial and new quantity.
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Price Elasticity of Demand Figure 4.2 calculates the price elasticity of demand for pizza. The price initially is $20.50 and the quantity demanded is 9 pizzas an hour.
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Price Elasticity of Demand The price falls to $19.50 and the quantity demanded increases to 11 pizzas an hour. The price falls by $1 and the quantity demanded increases by 2 pizzas an hour.
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Price Elasticity of Demand The average price (midpoint) is $20 and the average quantity demanded (midpoint) is 10 pizzas an hour.
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The percentage change in quantity demanded, % Q , is calculated as Q / Q ave , which is 2/10 = 1/5. The percentage change
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This note was uploaded on 04/03/2009 for the course ECON 2102 taught by Professor Bill during the Spring '08 term at Temple.

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Ch04 - Chapter 4: Elasticity Objectives: Define, calculate,...

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