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CN_intromicro_ch4

# CN_intromicro_ch4 - 1 Chapter 4 Elasticity Elasticity The...

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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

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2 Elasticity from A to B Q = (2 - 1) 1 . 5 = 0.6667 ; %Δ P = (8 - 9) 8 . 5 = - 0.1176 Thus E D = 0 . 6667 - 0 . 1176 = - 5.669 Elasticity from C to D Q = (4 - 3) 3 . 5 = 0.2857 ; %Δ P = (6 - 7) 6 . 5 = - 0.1538 Thus E D = 0 . 2857 - 0 . 1538 = - 1.858 Elasticity from F to G Q = (7 - 6) 6 . 5 = 0.1538 ; %Δ P = (3 - 4) 3 . 5 = - 0.2857 Thus E D = 0 . 1538 - 0 . 2857 = - 0.5383 Elasticity from H to I Q = (9 - 8) 8 . 5 = 0.1176 ; %Δ P = (1 - 2) 2 . 5 = - 0.6667 Thus E D = 0 . 1176 - 0 . 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- actly what the formula suggests finding the elasticity of demand at the MIDPOINT between those two values.

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CN_intromicro_ch4 - 1 Chapter 4 Elasticity Elasticity The...

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