Lecture 4 Elasticity

Lecture 4 Elasticity - Elasticity P S P S Elasticity D Q D...

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1 1 Elasticity 2 Elasticity P Q S D P Q S D 3 Problems with slope P Q (ozs) D P Q (lbs) D $3 5 $2 10 4 Elasticity of Demand • Elasticity of demand : a units-free measure of the responsiveness of quantity demanded to a change in price. P Q D / / = price in % demanded quantity in % = ε
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2 5 Example 1 = 2 1 10 5 = D ε Point A Q=-5 Q=10 P=1 P=2 Point B : Q=-80 Q=160 P=1 P=2 1 = 2 1 160 80 = 6 Terminology 0 1 2 3 7 Extreme Cases P Q D P Q D 8 Reinterpretation of Formula P Q / / = price in % demanded quantity in % = ε * slope 1 = * Q = ε
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3 9 Elasticity along a linear demand curve 2 3 4 Q P D 4 6 8 A B C Point A: Point B: Point C: 10 Elasticity along a linear demand curve P Q 11 Elasticity and Revenue (R=PQ) • Suppose ε >1 at point A • Suppose % P=-5, % Q=10 • What happens to revenue? R=P(1-.05)*Q(1+.10)=(.95)(1.10)PQ=1.045PQ
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Lecture 4 Elasticity - Elasticity P S P S Elasticity D Q D...

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