{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Sept 24 LEC Elasticity and its applications

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

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern