Chapter_3_Applying_the_Supply_and_Demand

Chapter_3_Applying_the_Supply_and_Demand - Chapter 3...

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Chapter 3 Applying the Supply-and-Demand Model Key questions: 1.What is meant by the concept of elasticity? Why does it play such an important role in predicting market outcomes? 2. What happens when market outcomes are interfered with, as when the government imposes price floors and ceilings? Why do such interferences give rise to shortages and surpluses?
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1.Sensitivity of Quantity Demanded to Price If the price of bread or milk is cut by 10%, would the quantity demanded of these items change much? If the price of premium ice cream is reduced by 10%, would the quantity demanded change much? Definition : The price elasticity of demand (or simply elasticity of demand ) measures the percentage change in the quantity demanded in response to a given percentage change in the price. % / % / d d d d d change in Q Q Q Q P change in P P P P Q ε = = =
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Figure 3.2: elasticity along the pork demand curve Note: On a linear demand curve, the elasticity of demand is not constant.
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Economic factors that determine the size of price elasticities for individual goods (1) Luxuries (e.g., perfume, ski trips, Mercedes cars) have higher elasticities than necessities. (2) Goods that have ready substitutes (e.g., purchased meals) have higher elasticities than those that do not have substitutes. (3)
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This note was uploaded on 02/22/2010 for the course EC EC 301 taught by Professor Dr.zhu during the Spring '10 term at Michigan State University.

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Chapter_3_Applying_the_Supply_and_Demand - Chapter 3...

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