Chapter 6 - Demand and Elasticity

Chapter 6 - Demand and Elasticity - Chapter 6 Demand and...

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Chapter 6 Demand and Elasticity A high cross elasticity of demand [between two goods indicates that they] compete in the same market. [This can prevent a supplier of one of the products] from possessing monopoly power over price. DUPONT CELLOPHANE DECI SI ON
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Elasticity: Measure of Responsiveness Price Elasticity of demand Ratio of Percentage change in quantity demanded To: percentage change in price Responsiveness of quantity demanded To price changes 2
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Hypothetical demand curves for film Figure 1 3 1.5 0 Quantity demanded 4 $20 10 Price per package D f D f b a (a) 0 3 Quantity demanded 4 $20 10 D s D s B A (b)
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Elasticity: Measure of Responsiveness Demand – elastic 10% rise in price >10% drop in quantity demanded Elasticity > 1 Demand – inelastic 10% rise in price <10% drop in quantity demanded Elasticity < 1 4
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360 Sensitivity of slope to units of measurement at Paul’s pizza parlor Figure 2 5 1 2 3 4 5 Price per Pizza $16 6 15 7 8 9 10 11 12 13 14 280 D D B A 2880 500 10001500 0 20002500 Slices of Pizzas per week (b) 3000 1 2 3 4 5 $16 6 15 7 8 9 10 11 12 13 14 2240 D D B A 500 10001500 0 20002500 Pizzas per week (a) 3000
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Elasticity: Measure of Responsiveness Elasticity formula Each change: percentage change Each percentage change Absolute value Price elasticity of demand = 6 1 0 0 1 1 0 0 1 P P )/ P (P Q Q )/ Q (Q and of average and of average - - =
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Elasticity: Measure of Responsiveness 1. Perfectly elastic demand curve Horizontal demand curve Infinitely elastic 2. Perfectly inelastic demand curve Vertical demand curve Zero elasticity 7
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Demand curves with different elasticities Figure 3 (a), (b) 8 0 Quantity demanded $0.75 Price D D (a) 0 90 Quantity demanded D D (b) “Perfectly elastic” demand curve “Perfectly inelastic” demand curve
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Chapter 6 - Demand and Elasticity - Chapter 6 Demand and...

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