Elasticity

# Elasticity - Elasticity Consider 2 points on a short run...

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Elasticity Consider 2 points on a short run demand curve. At a price of \$5 the quantity demanded is 20 and at a price of \$6 the quantity demanded is 15. Calculating the percentage change in price: the change in price is \$1 and the original price is \$5. The percentage change in price is Change in price divided by the original level of price. 1/5=20/100=.2 or 20% Calculating the percentage change in quantity: the change in quantity demanded is -5 and the original quantity demanded is 20. The percentage change in quantity is -5/20=-25/100=-.25 or 25%. The formula for the own-price elasticity of demand is %change quantity/%change price. In this case at a price of \$5 and quantity 20, the elasticity of demand is -25/20=-125/100=1.25 If in the long run, the quantity demanded at a price of \$5 remains at 20, but at a price of \$6 the quantity demanded is 10. Then the percentage change in quantity is -10/20=-50/100=.5 or 50%. The long run elasticity is then -50/20=-250/100=-2.5. Notice that the long run elasticity of demand is greater (in absolute

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Elasticity - Elasticity Consider 2 points on a short run...

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