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18 Monday, October 09, 2006

# 18 Monday, October 09, 2006 - is the E d,p 30 20 10 1 30 20...

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Monday, October 09, 2006 Microeconomics ELASTICITY is a measure of how buyers and sellers respond to changes in market conditions. GASOLINE P S2 S1 P*1 P*0 D Q*1 Q*2 Q ELASTICITY PRICE ELASTICITY OF DEMAND (E d,p ) is a number which measures the responsiveness of quantity demanded to changes in price. % ∆ Q d Percentage change in quantity demanded E d,p = = % ∆ P Percentage change in price MATHEMATICAL ASIDE Percentage change in variable X = % ∆ X = X 2 – X 1 Initial value approach X 1 Percentage change in a variable = % ∆ X = X 2 – X 1 Midpoint method = (X 2 + X 1 ) 2 This method is best for our purposes because it gives us the same Elasticity regardless of the direction of change (it is a more precise measure) Q 2 d - Q 1 d (Q 2 d - Q 1 d ) 2 Q 2 d - Q 1 d

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Monday, October 09, 2006 % ∆ Q d (Q 2 d + Q 1 d )/2 Q 2 d + Q 1 d Q 2 d + Q 1 d E d,p = = = = % ∆ P P 2 - P 1 (P 2 - P 1 ) 2 P 2 - P 1 (P 2 + P 1 )/2 P 2 + P 1 P 2 + P 1 Ex1 If price falls from 40 to 35. Quantity demanded increases from 20 to 30. What
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Unformatted text preview: is the E d,p ? 30 20 10 1 30 + 20 50 5 E d,p = = = = 15(1/5) = -3 35 40 -5 -1 Price elasticity Demanded is always (-) 35 + 40 75 15 Price Elasticity of Demanded is always being negative. This is because the way of demand tells us that price and quantity demanded are negatively related. E d,p is a unit less # Ex. 2 E d,p = -2.5 and price falls by 5%. What happens to Quantity Demanded? % Q d E d,p = % P % Q d-2.5 = = 12.5 % = % Q d-5 the larger the absolute value of E d,p the more responsive quantity demanded is to a change in price Absolute value of % Q d Demand E d,p relative to Response Monday, October 09, 2006 % P Greater than 1 % Q d &amp;gt; % P Elastic Between 0 and 1 % Q d &amp;lt; % P Inelastic Equal to 1 % Q d = % P Unit Elastic...
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18 Monday, October 09, 2006 - is the E d,p 30 20 10 1 30 20...

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