Sept 24 LEC Elasticity and its applications

Sept 24 LEC Elasticity and its applications - Elasticity...

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Elasticity and its applications Definition: The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good. Price elasticity of demand is the percentage chance in quantity demanded given a percentage change in the price. It is computer as the percentage change in the quantity demanded divided by the percentage change in price. Main determinants: Availability of Close Substitutes Necessities versus Luxuries Definition of the Market Time Horizon Demand tends to be more elastic: o The larger the number of close substitutes o If the good is a luxury o The more narrowly defined the market o The longer the time period Demand tends to be less elastic: o The lower the number of close substitutes o If the good is a necessity o The less narrowly defined the market o The shorter the time period Computing the price elasticity of demand: Example: If the price of an ice cream cone increase from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as: Interpretation – if you increase the price by 1%, you decrease the demand by 2%. If you decrease the price by 1%, you increase the demand by 2% Absolute value – 99.9% of cases, when you increase the price of a good or service, the demand goes down
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The mid-point method: The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change. Example: If the price of an ice cream cone increase from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, the using the midpoint formula, we have: Computing the elasticity of demand
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This note was uploaded on 12/08/2009 for the course TEFLER ADM1300 taught by Professor Koppel during the Fall '09 term at University of Ottawa.

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Sept 24 LEC Elasticity and its applications - Elasticity...

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