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2010 post-4

# 2010 post-4 - Elasticity a measure of responsiveness Q2 Q2...

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Elasticity – a measure of responsiveness I. Price Elasticity of Demand: . 2 2 % % 1 2 1 2 1 2 1 2 + - + - = = P P P P Q Q Q Q P Q e p This is the midpoint formula for e p . Example: Original Q New Q Avg. Q Orig. P New P Avg. P Cheese: 116,250 123,750 120,000 3.40 3.00 3.20 T – Shirts: 197,500 202,500 200,000 16.20 15.80 16.00 %∆Q %∆P Cheese: 7500/120,000 = 0.0625 – 0.40/3.20 = – 0.125 T – Shirts: 5000/200,000 = 0.025 – 0.40/16.00 = – 0.025 Elasticity Cheese: 0.0625/0.125 = ½ T – Shirts: 0.025/0.025 = 1

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A. Terms 1. Inelastic (demand): 0 < e p < 1 2. Elastic (demand): e p > 1 3. Unit elastic: e p = 1 4. Perfectly inelastic demand: e p = 0. Q d is not at all responsive to price changes. \$ D Q 5. Perfectly elastic demand: e p → ∞. Looking at the sellers point of view for the demand \$ D Q
B. Demand curves rarely have the same elasticity over every part of the curve. Example: P = 5 – 1/2Q P 5 4 3 2 1 0 2 4 6 8 10 Q The elasticity of demand will be different at different points on the demand curve. Elasticity of demand between prices of P

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2010 post-4 - Elasticity a measure of responsiveness Q2 Q2...

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