Ch 5 Elasticity

# Ch 5 Elasticity - Ch. 5 Elasticity Copyright 2006 Nelson, a...

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Elasticity  allows us to analyze supply and demand with greater precision. is a measure of how much buyers and sellers respond to changes in market conditions. measures how responsive Qd or Qs is to changes in price, income or prices of related goods.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Elasticity of Demand 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 change in quantity demanded given a percent change in the price.

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price elasticity = percentage change in Qd percentage change in P = % in Qd % in P
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Types of Price Elasticity People respond to changes in price differently depending on various factors. Are there a large number of substitutes? Is the good a luxury or a necessity? How narrowly defined is the market? What about the time period?

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Calculating price elasticity When we calculate elasticity, we calculate a numeric value called the coefficient of elasticity . We can tell how responsive Qd is to a change in price by the value of the coefficient. We’ll denote the coefficient for price elasticity by Ep (p for price).
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. If we are given percentage changes in price and the corresponding changes in Qd, we use the formula Ep = % in Qd % in P For example, The price of milk increases by 2% and Qd decreases by .5% Ep = -.5/2 = -.25

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Another formula we use is the midpoint formula . 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. We use it when we are given two prices and their corresponding Qd values.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. The midpoint formula is: Ep = (Q 2 – Q 1 ) / ([Q 2 + Q 1 ] / 2) (P 2 – P 1 ) / ([P 2 + P 1 ] / 2) 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:

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