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Unformatted text preview: Chapter 5: Elasticity and Its Application 20/09/2007 10:17:00 Elasticity of demand: elasticity- measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants price elasticity of demand- measures how much the quantity demanded responds to a change in price o % change quantity demanded / % change in price goods with close substitutes have more elastic demand o ex. butter vs margarine necessities have inelastic demands o going to the doctors vs buying sailboats market definition- broader category has inelastic demands o food vs ice cream time horizon- more elastic demand over longer time horizons o gasoline price rises, demand rises; then falls after a long time midpoint method: o price elasticity of demand= (Q2-Q1)/(Q2+Q1)/2 (P2-P1)/(P2+P1)/2...
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