Class 3-20100 - Managerial Economics Class 3 Thursday,...

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1 THE UNIVERSITY OF BRITISH COLUMBIA 1. Elasticity 2. Where do Demand Curves Come From 3. Using Regression Analysis to Estimate Demand 4. Assessing Apple’s Pricing Decision 5. Summary and Next Class Managerial Economics Class 3 –Thursday, Sept. 16 THE UNIVERSITY OF BRITISH COLUMBIA Elasticity The price elasticity of demand, ε , is the percentage change in quantity divided by the percentage change in price. ε = % Δ Q/% Δ p The arc price elasticity is the elasticity calculated as a movement between two points on the demand curve. The point (price) elasticity is the elasticity “at a point” -- the limit of the arc elasticity as the two points get closer and closer together.
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2 THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 1: Arc Elasticity Suppose that the price of avocados falls from $2.10 to $1.90 and the quantity demanded rises from 90 to 110. What is the arc price elasticity of demand for this change in price? a. -1 b. -1.5 c. -2 d. It varies from -1.5 to -2.5 e. none of the above THE UNIVERSITY OF BRITISH COLUMBIA Elastic and Inelastic Demand If the price elasticity of demand is more than 1 in absolute value (like -1.5) we say demand is elastic. If the price elasticity of demand is less than 1 in absolute value (like -0.5) we say is inelastic. If the elasticity = -1 we say demand has unitary elasticity. It is neither elastic nor inelastic. The elasticity equation is ε = % Δ Q/% Δ p. This equation can be rewritten as % Δ Q = ε % Δ p. Thus the percentage change in quantity is larger in absolute value than the percentage change in price if demand is elastic (if ε is bigger than 1 in absolute value).
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3 THE UNIVERSITY OF BRITISH COLUMBIA Point Elasticity The elasticity is: This can be rewritten as Qp pQ % % Q p The point elasticity is the elasticity at a point. It is the limit of the arc elasticity as the underlying change in price gets smaller and smaller and approaches zero. The limit of Δ Q / Δ p as Δ p approaches zero is the derivative dQ/dp . Therefore, the point elasticity is dQ p dp Q THE UNIVERSITY OF BRITISH COLUMBIA Elasticity Along a Linear Demand Curve The Elasticity Varies Along the Linear Demand Curve. The higher the price, the more elastic the demand curve (
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This note was uploaded on 01/19/2011 for the course COMMERCE 290 taught by Professor Brianogram during the Spring '09 term at The University of British Columbia.

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Class 3-20100 - Managerial Economics Class 3 Thursday,...

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