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**Unformatted text preview: **microL10-S2010-page http://www.arts.cornell.edu/econ/wissink/econ1110jpw/ Elasticity Measures - 2 Lecture 10-PREVIEW Dr. Jennifer P. Wissink 2009 John M. Abowd and Jennifer P. Wissink, all rights reserved. February 24, 2010 microL10-S2010-page http://www.arts.cornell.edu/econ/wissink/econ1110jpw/ Elasticity: The Exact Measurement via the Point Formula Lets make B&C get closer and closer to A. In the limit we would get the exact elasticity at point A. Elasticity() = [%change in Q] divided by [%change in P] EVALUATED AT A. Rearranging, you get: = ( d Q / d P) (P /Q ). Note that: ( d Q/ d P) is actually the slope of the demand curve equation when you have the equation, Q = f(P), evaluated at point A. Note: When you GRAPH demand, the slope you see is actually ( d P/ d Q), since its rise over run and the rise variable is price and the run variable is quantity. Books tend to call this the slope. microL10-S2010-page http://www.arts.cornell.edu/econ/wissink/econ1110jpw/ Slope Compared to Elasticity The slope measures the rate of change of one variable (P, for example) in terms of another (Q, for example). An elasticity measures the percentage change of one variable (Q) in terms of percentage change in another (P). microL10-S2010-page http://www.arts.cornell.edu/econ/wissink/econ1110jpw/ Elasticity: Point Formula for Own Price Elasticity of Demand A at Q P dP dQ X D X X X D P X D X ) / )( / ( , = A at Q P slope X D X P X D X ) / )( / 1 ( , = ... where slope refers to the slope of the demand curve as DRAWN in the graph of demand!! microL10-S2010-page http://www.arts.cornell.edu/econ/wissink/econ1110jpw/ Example Point Elasticity Calculation at P=$36 Q D = 30 1/2P OR P D = 60 2Q ( d Q D / d P) = -1/2 ( d P D / d Q) = -2 = slope Note: (1/ slope ) = -1/2 At point A, P=36 Q D =12 ) / )( / ( , X D X X X D P X D Q P dP dQ X = SO...own-price elasticity of demand = (-1/2)(3) = -1.5 Absolute value of the elasticity = 1.5 microL10-S2010-page...

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