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. The more broadly we define a good, the  fewer substitutes there are and the less  elastic the demand curve. 
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    Budget Share When the purchase of a good will  require a significant portion of the  consumer’s income, consumers are  more responsive to a price change for  the good (good is more price elastic)
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