chapter6 - Elasticity of Demand and Supply uppose you're...

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Copyright © 2007, .learn, Inc. All rights reserved. Elasticity of Demand and Supply S uppose you’re the owner of a popular pizzeria. You’re considering raising the price of your double-cheese deluxe by $1—but how will your customers react? You know that, according to the law of demand, when a good’s price rises, quantity demanded generally falls. But what you really need to know is the extent to which the quantity demanded of your deluxe pizzas will fall if you boost the price by $1. To forecast the effect of price changes on their revenues, businesses need a measure of buyer sensitivity to changes in price called the elasticity of demand . In this chapter, we’ll look at the conceptual problems involved in measuring elasticity of demand along points on the demand curve for a good. We’ll also develop measures of demand sensitivity to changes in such important demand determinants as consumer income and prices of substitutes and complements. Knowledge of demand sensitivity to income and the prices of related goods helps businesses market their products and manage resource use. For example, a retailer of casual clothing who knows the sensitivity of demand for jackets to fluctuations in consumer income can manage her inventory to avoid running short of jackets or incurring high costs for storing and financing stocks of the jackets. Elasticity of supply is a measure of the sensitivity of quantities supplied to changes in prices. As you’ll learn, knowledge of the supply elasticity of products is very useful in forecasting the impact of policies designed to influence quantities supplied by sellers in markets. You’ll also learn how knowledge of elasticity of both supply and demand is crucial in forecasting the impact of taxes and changes in tax rates on prices and government tax collections. After reading this chapter, you should be able to 1. Explain the uses of the concept of price elasticity of demand and show how it can be calculated for points on a given demand curve. 2. Use information on price elasticity of demand to forecast changes in total expen- diture on an item and total revenue from its sale when its price changes. 3. Explain how to use other elasticity mea- sures, including the income elasticity of demand, the cross-elasticity of demand, and the price elasticity of supply. 4. Show how the price elasticities of supply and demand are relevant to explaining the impact of taxes on market prices of goods and services. Concept Preview
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2 Product Markets Copyright © 2007, .learn, Inc. All rights reserved. Price Elasticity of Demand Price elasticity of demand is a number representing the percentage change in quantity demanded resulting from each 1 percent change in the price of a good. This number is used to gauge the sensitivity of quantity demanded of a good to percentage changes in the price of that good. Price elasticity of demand is a measure of the responsiveness of quantity demanded to price changes along a given demand curve.
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chapter6 - Elasticity of Demand and Supply uppose you're...

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