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Unformatted text preview: 1 Chapter 4 Elasticity Elasticity  The sensitivity of one variable due to changes in another variable. Types of Elasticities of Demand (Own) Price Elasticity The percentage change in quantity demanded caused by a change in the price of the good itself. E D = % Q D % P Cross Price Elasticity The percentage change in the quantity demanded of product A caused by a change in the price of product B. E A,B = % Q A % P B Income Elasticity The percentage change in the quantity demanded of a product caused by a change in income. E I = % Q D % I Percentage Change Formulas for Q, P and I Percentage Change Formula for Q % Q = New Quantity minus Old Quantity Average of New and Old Quantities = Q N Q O Q N + Q O 2 Percentage Change Formula for P % P = New Price minus Old Price Average of New and Old Prices = P N P O P N + P O 2 Percentage Change Formula for Income (I) % I = New Income minus Old Income Average of New and Old Incomes = I N I O I N + I O 2 2 Elasticity from A to B % Q = (2 1) 1 . 5 = 0.6667 ; % P = (8 9) 8 . 5 =  0.1176 Thus E D = . 6667 . 1176 =  5.669 Elasticity from C to D % Q = (4 3) 3 . 5 = 0.2857 ; % P = (6 7) 6 . 5 =  0.1538 Thus E D = . 2857 . 1538 =  1.858 Elasticity from F to G % Q = (7 6) 6 . 5 = 0.1538 ; % P = (3 4) 3 . 5 =  0.2857 Thus E D = . 1538 . 2857 =  0.5383 Elasticity from H to I % Q = (9 8) 8 . 5 = 0.1176 ; % P = (1 2) 2 . 5 =  0.6667 Thus E D = . 1176 . 6667 =  0.1764 3 Implication of the Midpoint formula and Linear Demand Curve When you use the midpoint formula to calculate the elasticity of demand you are doing ex...
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This note was uploaded on 10/14/2010 for the course DDF 1124445 taught by Professor Gorthermclays during the Spring '10 term at Florida College.
 Spring '10
 GortherMcLays

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