ELASTICITY - ELASTICITY The law of demand states that price...

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ELASTICITY The law of demand states that price and quantity demanded are inversely related, ceteris paribus. What we don't know is by what percentage quantity demanded changes as price changes. Suppose price rises by 10%. As a result, quantity demanded falls. But by what percentage does it fall? The answer to this question lies in the notion of price elasticity of demand. PRICE ELASTICITY OF DEMAND A measure of the responsiveness of quantity demanded to changes in price. E d = % ∆ in Q d % ∆ in P Note: Since P and Q d are inversely related, one would expect E d to take a (-) sign. However, E d is always shown as an absolute number - which mean it would always be shown as a positive number. MIDPOINT ELASTICITY FORMULA ∆ in Q d E d = % ∆ in Q d = (Q d1 + Q d2 )/2 % ∆ in P ∆ in P (P 1 + P 2 )/2 Example: Assume when P 1 = $10 → Q d1 = 100; Now assume that price rise from P 1 = $10 to P 2 = $12 and as a result, Q d decrease from Q d1 = 100 to Q d2 = 50. Calculate the midpoint elasticity. 50 E d = (100 + 50)/2 = 3.7 2 (10 + 12)/2 We use midpoint estimate to avoid having two values for E d , depending on whether the price increases or decreases
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PERFECTLY ELASTIC AND PERFECTLY INELASTIC DEMAND E d = % ∆ in Q d → Numerator % ∆ in P → Denominator The numerator can be greater than the denominator The numerator can be less than the denominator
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This note was uploaded on 01/28/2011 for the course ECON 1 taught by Professor Sm during the Spring '10 term at Laney College.

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ELASTICITY - ELASTICITY The law of demand states that price...

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