Chapter 5 notes - Chapter 5 Elasticity Defining and...

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Chapter 5: Elasticity Defining and measuring elasticity Price Elasticity of Demand Calculating the price elasticity of demand will yield a measure of price responsiveness Price elasticity of demand compares the percent change in quantity demanded to the percent change in price as one moves along the demand curve To calculate the price elasticity in demand first calculate the percent change in the quantitiy demanded and the corresponding percent change in the price as one moces along the demand curve % change in quantity demanded = change in quantity demanded/initial quantity X 100 % change in price = change in price/initial price X 100 Therefore price elasticity of demand is the percent change in quantity demanded/percent change in price It is understood that price elasticity of demand is a negative value The larger the price elasticity of demand the more responsive the quantity demanded is to the price Inelastic demand indicates that demand is not affected or not largely affected by a change in price Using the midpoint method to calculate elasticities Midpoint method is a method for calculating percent change. Midpoint method is as follows % change in X=Change in X/Average Value of X X 100 (this applies for both quantity and price) it Interpreting the Price Elasticity of Demand How Elastic is Elastic? A perfectly inelastic situation is one in which the the quantity demanded does not respond to a change in price. It is diagrammed as a vertical line on the demand chart.
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