Elasticity, ch. 4 - Elasticity, ch. 4 I. Price Elasticity...

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Elasticity, ch. 4 I. Price Elasticity of Demand 1. Units-free measure of responsiveness of quantity demanded of good to a change in its price when all other influences on buyers’ plans remain same b. Calculating Price Elasticity of Demand 1. Price elasticity of demand= percentage change in quantity demanded Percentage change in price 2. Express changes in price and quantity demanded as percentages of average price and average quantity ii. Units-Free Measure 1. Percentage change in each variable is independent of units in which variable measured iii. Minus Sign and Elasticity 1. When price of good rises, quantity demanded decreases along demand curve 2. Magnitude, or absolute value, of price elasticity of demand that tells how responsive, elastic, demand is c. Inelastic and Elastic Demand 1. Perfectly inelastic demand a. If quantity demanded remains constant when price changes, then price elasticity of demand is zero b. Ex. Insulin, important to diabetics, so if price rises or falls, do not change quantity bought 2. Unit elastic demand a. If percentage change in quantity demanded equals percentage change in price b. Price elasticity equals 1 3. Inelastic demand a. Percentage change in quantity demanded is less than percentage change in price 4. Perfectly elastic demand
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a. Quantity demanded changes by infinitely large percentage to tiny price change, then price elasticity of demand is infinity b. Ex. Soft drink from two machines located side by side i. If one price goes up, then buy from other 5. Elastic demand a. Percentage change in quantity demanded exceeds percentage change in price
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This note was uploaded on 05/06/2009 for the course MGMT 25100 taught by Professor Blanchard during the Spring '09 term at Purdue University-West Lafayette.

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Elasticity, ch. 4 - Elasticity, ch. 4 I. Price Elasticity...

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