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ECN_203__4___Product_Market_Demand

# ECN_203__4___Product_Market_Demand - Chapter 4 Market...

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Chapter 4- Market Demand Why does demand line (D) slope down? What determines the responsiveness of quantity demanded (Q d ) to price (P) changes? How does D respond to changes in in other variables?

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Why Demand Slopes Down? Consumer maximizes utility when MU 1 /P 1 = MU 2 /P 2 = … = MU n /P n If P 1 , then consumer should rebalance by MU 1 to make the ratio equal across goods again. Given diminishing Marginal Utility, this is done by having Q 1 .
Price Elasticity of Demand Price Elasticity of Demand ( ε P ) measures the responsiveness of quantity demanded (Q d ) of a good to changes in its own price. Elastic -- Q d highly responsive to changes in price (Flatter D). Inelastic -- Q d unresponsive to changes in price (Steeper D).

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Determinants of Price Elasticity Elasticity depends on the following: 1. Necessity versus Luxury 2. Number and Quality of Available Substitutes 3. Market Definition 4. Price Relative to Wealth or Income 5. Time Horizon
Price Elasticity of Demand ( ε ): A Formula ε P = |Percentage Change in Q| |Percentage Change in P| . **Always has positive sign– absolute value.

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Price Inelastic goods have 0< ε P < 1. Example
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ECN_203__4___Product_Market_Demand - Chapter 4 Market...

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