econ3 - < Further Analyses on Consumer Demand >...

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< Further Analyses on Consumer Demand > Elasticities Sometimes, we need to know how responsive the demand is to a change in price. Especially in empirical studies, we need a measure for the responsiveness: the elasticity. Price Elasticity of Demand * Definition: The absolute value of the ratio of percentage change in the quantity demanded to the percentage change in price, ceteris paribus. ? = "other things are constant." N = Q/Q _______ P/P = Q ____ P P __ Q ex) the price of a textbook went up \$50 \$55 the quantity of the textbook demanded went down 100 98 N = 100-98 _______ 50-55 50 ____ 100 = 2 __ 5 1 __ 2 = 0.2 ex) Suppose the price of a Rolex went up from \$1,000 to \$1,100, and the demand for Rolexs went down from 100 to 90 N = Q/Q _______ P/P = (100-90)/100 _________________ (1,001,100)/1,000 = 0.1 ____ 0.1 = 1 For small changes, either one is all right. It is customary to use the initial values. The arc elasticity can be used alternatively. The arc elasticity N a = Q/((Q 1 +Q 2 )/2) ________________ P/((P

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econ3 - < Further Analyses on Consumer Demand >...

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