Chapter Five- Elasticity

Chapter Five- Elasticity - Hotel School of Administration...

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Elastic Range Inelastic Range Price   \$ Quantity Demanded  D E = 1 Hotel School of Administration HADM 1141 Chapter Five: Elasticity  ο Elasticity provides a technique for estimating the response of one variable to  changes in some other variable ο Price Elasticity of Demand  A measure of the responsiveness of quantity demanded to changes in price  It addresses the “percentage change in quantity demanded for a given  percentage change in price”  E percentage c h ange in quantity demandedpercentage c h ange in price  =  % % Qd P  =  ∆QdQd average∆PPaverage ο Elasticity is not a slope ο From Perfectly Elastic to Perfectly Inelastic Demand  Focusing on the numerator and denominator of E we realize that  The numerator can be greater than the denominator  The numerator can be less than the denominator  The numerator can be equal to the denominator  Elasticity  Coefficient Responsiveness of Quantity Demanded to  Change in Price Terminology > Ed 1 Quantity demanded changes proportionately more  than price changes:  % >% ∆Qd ∆P Elastic < Ed 1 Quantity demanded changes proportionately less  than price changes:  % <% ∆Qd ∆P Inelastic = Ed 1 Quantity demanded changes proportionately to  price change:  % =% ∆Qd ∆P Unit elastic >∞ Ed

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