Chapter 5 - Elasticity - Chapter 5 Elasticity Elasticity...

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Chapter 5 Elasticity
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Elasticity 2 measure of how much buyers and sellers respond to changes in market conditions. measures how responsive Qd or Qs is to changes in price , income or prices of related goods .
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Elasticity of Demand 3 Price elasticity of demand, Ep : measures how much the quantity demanded of a good responds to a change in the price of that good. Ep = percentage change in Qd percentage change in P = % r in Qd (new – old) %r in P old
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4 Coefficient of elasticity : the number we get from our calculation Size of coefficient will tell us how elastic the good is – how responsive demand is to a change in price.
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Types of Demand 5 Inelastic Demand Quantity demanded does not respond strongly to price changes. The % change in Qd < % change in P Ep < 1 Demand curve = fairly steep
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6 Inelastic Demand Q P D
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7 Elastic Demand Quantity demanded responds strongly to changes in price. The % change in Qd > % change in P Ep > 1 Demand curve = fairly flat Ep = % change Qd % change in P
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8 Elastic Demand P D Q
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9 Perfectly Inelastic Demand Quantity demanded does not respond to price changes at all. Ep = 0 Demand curve = vertical
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10 Perfectly Inelastic Demand D P Q
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11 Perfectly Elastic Demand Quantity demanded changes infinitely with any change in price. Ep => infinity Demand curve = horizontal
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12 Perfectly Elastic Demand D P Q At any P above P*, demand is 0. At any P below P*, demand is infinite. P*
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13 Unit Elastic Quantity demanded changes by the same percentage as the price Ep = 1 Demand curve = non-linear
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14 Unit Elastic Demand D P Q
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Recap 15 Ep = 1, demand unit elastic Ep > 1, demand elastic Ep < 1, demand inelastic
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Calculating Elasticity (2 ways) 16 1) Ep = % r in Qd Change in Q = new- old %r in P Q old Example 1: The price of milk increases by 2% and Qd decreases by .5% Ep = -.5/2 = -.25 Ep < 1 inelastic
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17 Point Elasticity: measures the impact of a marginal change in price on quantity demanded.
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