Chapter 5

Chapter 5 - Chapter 5: Elasticity When discussing Consumer...

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Chapter 5: Elasticity When discussing Consumer reactions to price changes, and the subsequent change in Quantity Demanded, the question will arise: if price changes by a given percentage, how will demand change Price Elasticity of Demand answers such a question by measuring the responsiveness of Q D to changes in price Elasticity of Demand is represented as E D E D = Percentage Change in Quantity Demanded Percentage Change in Price This formula is expressed as: ∆ Q D Q D average___ =Elasticity of Demand ∆ P P average Using the numbers taken from the Demand Schedule, the Price Elasticity of Demand may be calculated Price Elasticity is measured point by point (i.e. A to B, B to C, not A to C) Point Price Q D A $20 30 B $15 60 C $10 90 30-60 30 2 (30+60/2)__ = __45__ = __3 __ = 2.339 20-15 5 5 (20+15/2) 17.5 17.5 Even though the slope may be the same, the elasticity is not Slope vs. Elasticity The slope will remain constant across the curve, while elasticity may be changing What? Again, demand curves stem from n umbers. Given we are measuring % changes, recall what happens to a given 100 units of quantity if a flat 10% is subtracted over and over again. It doesn’t go 90, 80, 70 So if fixed increments are subtracted, as with the slope, the percentage value for each point shift is changing Elasticity of Demand Elastic Demand - strictly speaking, when E D is greater than 1, demand is said to be elastic. There is a greater percentage change observed in demand given a percentage change in price. o Ex: the price of beer rose 10%, and sales fell 15% o Price changes within the elastic range of the demand curve create larger shifts in Q D o Should the Demand for a good be Elastic, then the % change in Q D will be greater than the % change in price. Thus, a new higher price will yield a relatively larger drop in units sold. A new lower price will yield a relatively large increase in units sold The effect upon total revenues will reflect the reactive swings in demand This may be expressed as: ↑P ↓TR and ↓P ↑TR
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Inelastic Demand - when E D is less than 1, the percentage change in Q D (Quantity Demanded) is less than the percentage change in price o Ex: the price rises 10%, but sales only decline 5% o Price changes within the inelastic portion of the demand curve produce less of an effect of demand
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This note was uploaded on 11/03/2009 for the course ECON 2000 taught by Professor Roussell during the Fall '06 term at LSU.

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Chapter 5 - Chapter 5: Elasticity When discussing Consumer...

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