Chapter 4-3.docx - 70 Chapter 4 Demand Elasticity Dividing the first expression by the second we arrive at the expression for the price elasticity of

Chapter 4-3.docx - 70 Chapter 4 Demand Elasticity Dividing...

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70 Chapter 4 Demand Elasticity Dividing the first expression by the second, we arrive at the expression for the price elasticity of demand: _Quantity Quantity , _Price Price = %_Quantity %_Price This is the general expression. We turn now to the actual computation of elasticities, and we describe two methods of obtaining the price elasticity of demand. Measurement of Price Elasticity Let us begin with arc elasticity , the method most commonly used in economics textbooks. The formula for this indicator is E p = Q 2 - Q 1 ( Q 1 + Q 2 )>2 , P 2 - P 1 ( P 1 + P 2 )>2 where E p = Arc price elasticity Q 1 = Original quantity demanded Q 2 = New quantity demanded P 1 = Original price P 2 = New price The numerator of this fraction, 1 Q 2 - Q 1 2 > 31 Q 1 + Q 2 2 >2], indicates the percentage change in the quantity demanded. The denominator, 1
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Unformatted text preview: P 2 - P 1 2 > 31 P 1 + P 2 2 >2)4, indicates the percentage change in the price. Notice that the change in each variable is divided by the average of its beginning and ending values. For example, if the price of a product rises from $11 to $12, causing a fall in the quantity demanded from 14 to 12, the formula gives the following price elasticity coefficient: E p = 12 - 14 114 + 122/2 , 12 - 11 111 + 122 >2 =-2 13 , 1 11.5 =-2 13 * 11.5 1 =-23 13 = -1.77 The reason the arc elasticity formula employs the average of the beginning and ending values can be clearly seen. If we had used the beginning values, the coefficient would be E p = 12 - 14 14 , 12 - 11 11 =-2 14 , 1 11 =-1 7 * 11 1 =-11 7 = -1.57 Module 4A APP...
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