ECON20023 T1 2008 Lecture 3

# ECON20023 T1 2008 Lecture 3 - ECON20023 ECONOMICS FOR...

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ECON20023 ECONOMICS FOR BUSINESS T1 2008 LECTURE 3 Galina Ivanova, CQU

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Based on slides from Layton et al ( 2 Chapter 5 Elasticity of supply and demand – is important for production and pricing decisions Combinations of four scenarious: Elastic demand Inelastic demand Elastic supply Inelastic supply
Based on slides from Layton et al ( 3 Key concepts What is elasticity? What is price elasticity of demand? What is income elasticity of demand? What is cross elasticity of demand? What is price elasticity of supply? Tax burden and elasticity

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Based on slides from Layton et al ( 4 The concept of elasticity Elasticity is the term used in economics to explain the sensitivity of one variable to changes in another variable. Elasticity is useful for business decision- making (e.g. pricing, marketing) and policy making.
Based on slides from Layton et al ( 5 Price elasticity of demand Price elasticity of demand measures the sensitivity of quantity demanded by consumers to changes in price. It is calculated as the ratio of the percentage change in quantity demanded of a product to a percentage change in the price of the that product. The formula for price elasticity of demand is: E d = percentage change in quantity demanded percentage change in price

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Based on slides from Layton et al ( 6 Numerical example A rock group raises ticket price from \$25 to \$30, and the number of seats sold falls from 20 000 to 10 000 as a result. 2.5 25% 50% 25 25 30 000   20 000   20 000   10 P % Q % d E = = - - = =
Based on slides from Layton et al ( 7 But what if … We compute elasticity between the same two points when the price is lowered rather than raised 9 . 5 17% 100% 30 30 - 25 000   10 000   10 000   20 P % Q % d E = = - = =

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Based on slides from Layton et al ( 8 The midpoint formula We can overcome this disparity using the midpoint formula. change in quantity sum of quantities/2 E d  = change in price sum of prices/2 / ( 29 ( 29 2 2 2 1 1 2 2 1 1 2 / P P P P / Q Q Q Q P % Q % d E + - + - = = Ed = 3.7
Based on slides from Layton et al ( 9 Elasticity coefficients Note that, at an introductory level, it is conventional to ignore the minus sign that should result from calculations. The elasticity coefficient could be: Elastic ( E d >1) Inelastic ( E d <1) Unitary elastic ( E d = 1)

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10 Elastic demand ( E d >1) Elastic demand indicates that the percentage change in quantity demanded is greater than the percentage change in price. This means consumers are sensitive to the
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## This note was uploaded on 09/06/2009 for the course MGMT econ taught by Professor Galinaivanova during the Spring '09 term at University of Central Arkansas.

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ECON20023 T1 2008 Lecture 3 - ECON20023 ECONOMICS FOR...

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