section2_1 - Department of Economics University of...

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Department of Economics University of California, Berkeley ECON 100A Spring 2010 - Section 2 GSI: Antonio Rosato 1 Demand and Supply Elasticities Elasticities are a very important tool in positive analysis. What they provide us with is a unit-free measure of quantitative changes in the market. What do I mean by that? Monetary units can change across countries, or as we saw last time, across different years: today’s dollar is not exactly the same as the one a year ago. Also, different goods and products are measured in different units. Wheat will be measured in bushels, and cars will be measured in, well, cars. So when we want to say something that doesn’t depend on the unit, the natural choice is to talk about a percentage change in quantity resulting from a 1% change in price. Price elasticity of demand : What is the percentage change in the quantity de- manded for an increase of 1% in price. We denote this elasticity by E D P , and the formula for it is E D P = Q D P = ∂Q D ∂P · P Q D Example: Q D = 100 - 2 P Q S = - 20 + 2 P Solving for the equilibrium by setting Q D = Q S , we get P = 30 , Q = 40. What is ∂Q D /∂P ? What is the price elasticity of demand? The price elasticity of demand is usually a negative number. When we have a change
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section2_1 - Department of Economics University of...

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