Chapter 6

Chapter 6 - Chapter 6 Demand and Elasticity Elasticity: The...

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Chapter 6 – Demand and Elasticity Elasticity: The Measure of Responsiveness The (price) elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in price that brings about the change in quantity demanded. To summarize, the elasticity formula has two basic attributes: o Each of the changes with which it deals is measured as a percentage change. o Each of the percentage changes is calculated in terms of the average values of the before and after quantities and prices. Each percentage change is taken as an “absolute value,” meaning that the calculation drops all minus signs. Price elasticity of demand = Change in quantity demanded, expressed as a percentage of the average of the before and after quantities divided by the corresponding percentage change in price Price Elasticity of Demand and the Shapes of Demand Curves o Perfectly Elastic Demand Curves o Perfectly Inelastic Demand Curves o (Seemingly Simple) Straight-Line Demand Curves Along a straight-line demand curve, the price elasticity of demand grows steadily smaller as you move from left to right. That is so because the quantity keeps getting larger, so that a given numerical change in quantity becomes an ever-smaller percentage change. But, simultaneously, the price keeps getting lower, so that
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Chapter 6 - Chapter 6 Demand and Elasticity Elasticity: The...

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