Chapter 4 PowerPoint Slides-Elasticity

Chapter 4 PowerPoint Slides-Elasticity - Elasticity Chapter...

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    Elasticity Chapter 4
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    Price Elasticity of Demand Standardized measurement of how  responsive consumers (as reflected in a  change in quantity demanded) are to a  price change Calculated as the percentage change in  quantity demanded divided by the  percentage change in price             
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    Price Elasticity of Demand E = % Change Q/% Change P E D  =  (q 2  - q   1 )    /       (p   2  - p   1 )     = midpoint            (q 1  + q 2 )/2         (p 1  + p 2 )/2 formula E D  = (q2-q1)/q1 / (p2-p1)/p1 E D  = P/Q * 1/slope = slope formula
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    Price Elasticity of  Demand Example At $6.00 a can of Maxwell House coffee,  quantity demanded is 120,000 cans At $7.00 a can, quantity demanded is  112,000 cans  E D  =     (112,000 - 120,000)     /   (7.00 - 6.00)            (120,000 + 112,000)/2    (6.00 + 7.00)/2  E D  =    -0.069 / 0.154  =  |- 0.45| = 0.45
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    Price Elasticity of Demand  Example Interpreting Elasticities A 1 % increase in price will lead to an E D decrease in quantity demanded In the Maxwell House example, when the  price of coffee is $6, a 1% increase in the  price of coffee will decrease quantity  demanded by 0.45%. A 10% decrease in the price of coffee will  increase quantity demanded by 10*0.45 =  4.5%
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    Demand Elasticity If |E D | = 1, then demand is UNIT ELASTIC,  so the percent change in price and quantity  are equal If E D  < 1, the demand is INELASTIC and is  unresponsive to price changes  If  ED > , then demand is ELASTIC and is  responsive to price changes
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    Determinants of  Price Elasticity of Demand Availability of substitutes Budget Share Time
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  Availability of Substitutes The more available substitutes there are  for a good, the greater the price elasticity  of the demand curve. The more similar substitutes are for the  original good, the greater the price  elasticity of the demand curve.
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This note was uploaded on 04/30/2008 for the course ECO 2306 taught by Professor Mencken during the Fall '07 term at Baylor.

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Chapter 4 PowerPoint Slides-Elasticity - Elasticity Chapter...

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