econ1001_endofchapter04

econ1001_endofchapter04 - Chapter 4 Elasticity Problem #1,...

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Chapter 4 Elasticity
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Problem #1, Chapter 4 On the accompanying demand curve, calculate the price elasticity of demand at points A, B, C, D and E. 0 Quantity Price 100 A B C D E 100 75 50 25 25 50 75
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Solution to Problem #1 (1) Price elasticity of demand refers to the percentage change of quantity demanded relative to the percentage change of price In other words, price elasticity of demand indicates how much will the quantity demanded change with respect to a 1% change in price Thus, it measures the responsiveness of quantity demanded to change in price
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Solution to Problem #1 (2) Price elasticity of demand is always a negative index, as the demand curve is downward sloping For convenience, we always take absolute value of a price elasticity of demand When the absolute value of a price elasticity of demand is greater than one , that means percentage change in quantity demanded is greater than percentage change in price If this is the case, we regard the highly responsive demand as ELASTIC
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Solution to Problem #1 (3) When the absolute value of a price elasticity of demand is less than one , that means percentage change in quantity demanded is less than percentage change in price If this is the case, we regard the weakly responsive demand as INELASTIC When the absolute value of a price elasticity of demand is exactly equal to one , that means percentage change in quantity demanded is the same as percentage change in price If this is the case, we regard the mirror-responsive demand as UNITARY ELASTIC
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Solution to Problem #1 (4) General formula for (Own) Price Elasticity of Demand: (Change of quantity demanded / Total quantity demanded) / (Change of price / Original Price) Rearranging terms, we will get (Change in quantity demanded / Change in price) * (Original Price / Total quantity demanded) (1 / Slope of the demand curve) * (P / Q) Using the formula, we can derive price elasticity of demand at any point along the demand curve
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Solution to Problem #1 (5) Point A 1 / Slope of the demand curve 1 / (-100/100) = -1 Price is $100 and quantity demanded is 0 Price elasticity of demand = -1 * (100 / 0) Price elasticity of demand = Infinity The demand is perfectly elastic Point B 1 / Slope of the demand curve = -1 Price is $75 and quantity demanded is 25 Price elasticity of demand = -1 * (75 / 25) Price elasticity of demand = -3 (Or 3 in if we take absolute value) As it is greater than 1, the demand is elastic
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Solution to Problem #1 (6) Point C 1 / Slope of the demand curve = -1 Price is $50 and quantity demanded is 50 Price elasticity of demand = -1 * (50 / 50) Price elasticity of demand = -1 (Or 1 if we take the absolute value) As it is exactly equal to 1, the demand is unitary elastic Point D 1 / Slope of the demand curve = -1 Price is $25 and quantity demanded is 75 Price elasticity of demand = -1 * (25 / 75)
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This note was uploaded on 10/14/2010 for the course ECON ECON1001 taught by Professor Ka-fuwong during the Spring '10 term at HKU.

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econ1001_endofchapter04 - Chapter 4 Elasticity Problem #1,...

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