# L5 - ECON 2106-C Prof Byung-Cheol Kim THE ELASTICITY OF...

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ECON 2106-C Prof. Byung-Cheol Kim

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THE ELASTICITY OF DEMAND The is a measure of how much the quantity demanded of a good responds to a change in the price of that good. When we talk about elasticity , the responsive- ness is always measured in terms. Specifically, the price elasticity of demand is the percentage change in quantity demanded due to a percentage change in the price.
Computing the Price Elasticity of Demand The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price elasticity of demand = Percentage change in quantity demanded Percentage change in price

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Computing the Price Elasticity of Demand Example: If the price of an ice cream cone increases 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: () (. . ) . 10 8 10 100 220 200 200 100 20% 10% 2 × × == Price elasticity of demand = Percentagechange in quantity demanded Percentage change in price
A Different Way to Calculate the Elasticity !? If we measure a bit differently (focusing the quantity of demanded and the price after the price change), your elasticity of demand would be calculated as: 74 . 2 % 1 . 9 % 25 100 20 . 2 ) 00 . 2 20 . 2 ( 100 8 ) 8 10 ( = = × ×

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The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the price change. 21 () / [ / 2 ] Price elasticity of demand = / [ / 2 ] QQ PP + −+
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities Example: If the price of an ice cream cone increases from \$2.00 to \$2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand, using the midpoint formula, would be calculated as: (10 8) 22% (10 8) / 2 2.32 (2.20 2.00) 9.5% (2.00 2.20)/2 + == +

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The Price Elasticity of Demand and Its Determinants Demand tends to be more elastic: the larger the number of close substitutes. • Salad dressings vs. GT football ticket, your examples? if the good is a luxury. • Yacht vs. Groceries, you examples? the more narrowly defined the market. • Office supplies market (Big 3 vs. Big3+all), your examples? the longer the time period. • Monthly Æ Yearly, your examples?
The Variety of Demand Curves Inelastic Demand Quantity demanded does not respond strongly to price changes.

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## This note was uploaded on 02/15/2010 for the course ECON 2106 taught by Professor Minjaesong during the Spring '06 term at Georgia Tech.

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L5 - ECON 2106-C Prof Byung-Cheol Kim THE ELASTICITY OF...

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