ch05-consumerwelfare

ch05-consumerwelfare - Marshallian Demand Elasticities...

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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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Marshallian Demand Elasticities • Income elasticity of demand ( e x , I ) x x x x e x I I I I I / / , • Cross-price elasticity of demand ( e x , p y ) x p p x p p x x e y y y y p x y / / ,
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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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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
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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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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.

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ch05-consumerwelfare - Marshallian Demand Elasticities...

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