Ch. 5 Price Elasticity

# Ch. 5 Price Elasticity - Price Elasticity of Demand and...

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Price Elasticity of Demand and Supply

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2 What will this chapter teach me? This chapter teaches you to calculate the percentage change in the quantity demanded when the price changes by a given percentage. Then you will see how this relates to total revenue.
3 How is the percent increase or decrease of two numbers calculated? Percent change is the difference between the two numbers divided by the original number

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4 Suppose the price of a rock concert increases by 10%, what effect will this have on sales? That all depends on the price elasticity of demand for this rock concert
5 What is elasticity? A term economists use to describe responsiveness, or sensitivity, to a change in price

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6 What is price elasticity of demand? The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price
7 % in Q demanded in price E d = Price Elasticity of Demand

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8 Supposing a university’s enrollment drops by 20% because tuition rises by 10%, what is the price elasticity of demand?
9 E d = -20% +10% -.20 +.10 2

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10 Why is elasticity 2 in the previous example and not -2? Economists drop the negative sign because we know from the law of demand that quantity demanded and price are inversely related
11 If there is an increase from 3 units to 5, what is the percentage increase? 2/3 = 66%

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12 If there is a decrease from 5 units to 3, what is the percentage decrease? 2/5 = 40%
13 Problem - When we move along a demand curve between two points, we get different answers to elasticity depending on whether we are moving up or down the demand curve

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14 A B 2 3 P Q D
15 Economists can solve this problem of different base points by using the midpoints as the base points of changes in prices and quantity demanded

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16 in quantity demanded sum of quantities/2 divided by in price sum of prices/2 Price elasticity equals the
17 What is elastic demand?

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## This note was uploaded on 06/28/2009 for the course ECON 71098 taught by Professor Mathieuzahui during the Fall '08 term at Palomar.

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Ch. 5 Price Elasticity - Price Elasticity of Demand and...

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