Slides FV L2

# Slides FV L2 - EWMBA 201A Economic Analysis for Click...

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Click to edit Master subtitle style 9/16/09 EWMBA 201A Economic Analysis for Business Decisions Lecture 2: Elasticities and Decision Analysis August 17-18, 2009 Felix Várdy

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9/16/09 Overview Elasticity Pricing project Names Decision analysis
9/16/09 Elasticity Which demand curve would you rather face as a firm? P Q

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9/16/09 Elasticity Elasticity is a number that, roughly speaking, measures the change in quantity demanded (∆Q) for a given change in price (∆P). Clearly related to slope of demand function. The flatter the demand curve, the larger ∆Q for given ∆P, the more “ price-elastic” is the demand.
9/16/09 Elasticity Simple solution to make measure “unit invariant:” Express changes (in quantity and price) not in absolute, but in relative, i.e., %-terms! Elasticity: %-change in quantity demanded for a 1% -change in price. Note: when go from kg to g, %-change remains the same k more convenient formulation

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9/16/09 Elasticity Goods is called elastic if ε < -1; hence, in absolute value greater than 1. “More than proportional.” Goods is called inelastic if ε > -1; hence, in absolute value smaller than 1. “Less than proportional.” Linear demand does not have constant ε. (Which curve does?) Q Elasti c ( %∆Q large) Inelastic ( %∆Q small) P Q P Q P Perfectly elastic Perfectly inelastic
9/16/09 Elasticity Symbolically, at (P,Q), price-elasticity of demand, ε, is: ε = %∆Q / %∆P = (∆Q/Q) / (∆P/P) = (∆Q/∆P) • (P/Q) = Slope • (P/Q) ( < 0) Price elasticity between two points (P1, Q1) & (P2, Q2) calculated as:

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9/16/09 Elasticity
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