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note1 - ch4

# note1 - ch4 - d of chocolate bars is linear'Demand...

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Econ 251 Fall 2009 Handout 5 09/08/09 1 Chapter 4 - Elasticity I. Price Elasticity of Demand Example: Def. Price-Elasticity of Demand ( ε d ) The Price-Elasticity of Demand measures Slope of demand = => inverse of the slope = Problems with slope: We need a __________________________ of the price elasticity of demand! look at changes in price and quantity demanded in ______________________

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Econ 251 Fall 2009 Handout 5 09/08/09 2 Price elasticity of demand = glyph817otation : Example: price of coffee goes up by 10% and quantity demanded decreases by 5% How do we calculate the price-elasticity of demand? Base = Base = The price elasticity of demand can take values in the following three ranges : square4 ε d The demand is __________________________ square4 ε d The demand is __________________________ square4 ε d The demand is __________________________
Econ 251 Fall 2009 Handout 5 09/08/09 3 Example Assume that the relationship between the price (P) and quantity demanded (Q

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Unformatted text preview: d ) of chocolate bars is linear. 'Demand Function' 'Inverse Demand Function' Case 1 : Suppose that price changes from \$2 to \$4. Case 2 : Now, suppose that price changes from \$8 to \$10. Slope = Econ 251 Fall 2009 Handout 5 09/08/09 4 When the demand curve is linear, it is always the case that _______________________ Below Midpoint: Above Midpoint: At Midpoint: II. Determinants of the price-elasticity of demand: 1. Other things equal: • small proportion of income (budget) ___________________________________ • large proportion of income (budget) ___________________________________ Ex: 2. • Many ______________________ for a good/service _______________________ • Few _______________________ for a good/service ______________________ Ex: 3. • More time b • Less time b Ex: Econ 251 Fall 2009 Handout 5 09/08/09 5 Two Extremes: Q...
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