Econ501aL6

# Econ501aL6 - Elasticity of Demand How should one measure...

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Elasticity of Demand How should one measure the sensitivity of demand to changes in prices or income? dx dp x ; dx dp y ; and dx dM depend on the units in which x is measured. Whether dx dp x is ¡ 10 (millions of gallons) or ¡ 10 ; 000 (thousands of gallons) obviously makes a big di®er- ence. The elasticity of demand is the percentage change in demand, per percentage change in price or income.

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The own-price elasticity of demand: " d = % 4 x % 4 p x = 4 x=x 4 p x =p x : (1) Equation (1) is the de¯nition of the so-called arc elas- ticity, for a move from one point on the demand curve to another. By convention, we take x and p x in (1) to be the averages, ( x 1 + x 2 ) = 2and( p x; 1 + p x; 2 ) = 2. The own-price elasticity of demand at a single point is the limiting arc-elasticity: " d = dx dp x μ p x x : Because demand is downward sloping, " d is negative.
If " d < ¡ 1, we say that demand is elastic (demand changes a lot or \stretches" in response to a price change). If

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Econ501aL6 - Elasticity of Demand How should one measure...

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