Chapter50 - AGEC 105 Chapter 5 Elasticities Announcements...

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Chapter 5 Elasticities AGEC 105
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Announcements Exam 1, Wednesday, September 29, Ch. 1, 3, 4 and 5 Review sessions, Tuesdays, Blocker 113, 7:30- 9:30pm Review problems are posted on E-LEARNING
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Discussion Topics Own price elasticity of demand Income elasticity of demand Cross price elasticity of demand Other general properties Applicability of demand elasticities
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Key Concepts Covered… Own price elasticity = % Q beef for a given % P beef Income elasticity = % Q beef for a given % Income Cross price elasticity = % Q beef for a given % P chicken Arc elasticity = range along the demand curve Point elasticity = point on the demand curve Price flexibility = reciprocal of own price elasticity
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Own Price Elasticity of Demand
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Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = Point Elasticity Approach
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Own Price Elasticity of Demand Point elasticity: = [ Q ÷ ∆ P] × [P a ÷ Q a ] Own price elasticity of demand Own price elasticity of demand Percentage change in quantity Percentage change in price = Q = (Q a – Q b ); and P = (P a – P b ) The subscript “a” here stands for “after” while “b” stands for “before” Single point on curve P a Q a
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Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = Arc Elasticity Approach
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Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = where: P = (P a + P b ) ÷ 2; Q = (Q a + Q b ) ÷ 2; Q = (Q a – Q b ); and P = (P a – P b ) Arc elasticity Own price elasticity of demand = [ Q ÷ ∆ P] x [P ÷ Q] The subscript “a” here again stands for “after” while “b” stands for “before” The “bar” over the P and Q variables indicates an average or mean.
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Own Price Elasticity of Demand Own price elasticity of demand Percentage change in quantity Percentage change in price = where: P = (P a + P b ) ÷ 2; Q = (Q a + Q b ) ÷ 2; Q = (Q a – Q b ); and P = (P a – P b ) Arc elasticity Own price elasticity of demand = [ Q ÷ ∆ P] x [P ÷ Q] The subscript “a” here again stands for “after” while “b” stands for “before” Specific range on curve P b P a Q b Q a
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Interpreting the Own Price Elasticity of Demand If elasticity coefficient is: Demand is said to be: % in quantity is: Greater than 1.0 Elastic Greater than % in price Equal to 1.0 Unitary elastic Same as % in price Less than 1.0 Inelastic Less than % in price
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Demand Curves Come in a Variety of Shapes Perfectly inelastic Perfectly elastic Inelastic Elastic
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Demand Curves Come in a Variety of Shapes Inelastic where % Q < % P Elastic where % Q > % P Unitary Elastic where % Q = % P
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Example of arc own-price elasticity of demand Unitary elasticity…a one for one exchange Elastic demand Inelastic demand
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P b P a Q b Q a Price Quantity Elastic Demand Curve 0 Cut in price Brings about a larger increase in the quantity demanded c What happened to producer revenue?
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