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Marshallian Demand
Elasticities
• Price elasticity of demand (
e
x
,
p
x
)
x
p
p
x
p
p
x
x
e
x
x
x
x
p
x
x
/
/
,
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View Full Document Marshallian Demand
Elasticities
• Income elasticity of demand (
e
x
,
I
)
x
x
x
x
e
x
I
I
I
I
I
/
/
,
• Crossprice elasticity of demand (
e
x
,
p
y
)
x
p
p
x
p
p
x
x
e
y
y
y
y
p
x
y
/
/
,
Price Elasticity of Demand
• The own price elasticity of demand is
always negative
– the only exception is Giffen’s paradox
• The size of the elasticity is important
– if
e
x
,
p
x
< 1, demand is elastic
– if
e
x
,
p
x
> 1, demand is inelastic
– if
e
x
,
p
x
= 1, demand is unit elastic
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View Full Document Price Elasticity and Total
Spending
• Total spending on
x
is equal to
total spending =
p
x
x
• Using elasticity, we can determine how
total spending changes when the price of
x
changes
]
1
[
)
(
,
x
p
x
x
x
x
x
e
x
x
p
x
p
p
x
p
Price Elasticity and Total
Spending
• If
e
x,p
x
> 1, demand is inelastic
– price and total spending move in the same
direction
• If
e
x,p
x
< 1, demand is elastic
– price and total spending move in opposite
directions
]
1
[
)
(
,
x
p
x
x
x
x
x
e
x
x
p
x
p
p
x
p
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View Full Document Consumer Surplus
• Suppose we want to examine the
change in an individual’s welfare when
price changes
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This note was uploaded on 10/22/2009 for the course ECG 700 taught by Professor Morrill during the Fall '09 term at N.C. State.
 Fall '09
 Morrill

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