This preview shows pages 1–3. Sign up to view the full content.
Elasticity
2/17/11 11:58 PM
A Scenario
•
You design websites for local businesses
•
You charge $200 per website and currently sell 12 websites per
month
•
Your costs are rising (including the OC of your time), so you
consider the raising the price to $250
•
The law of demand says you won’t sell as many if you raise your
price
•
But how many fewer websites would you sell?
•
By how much will your revenue increase, or is there a chance that it
might fall?
Elasticity
•
Elasticity measures how much one variable responds to changes in
another variable (how sensitive, how responsive)
o
ex. By how much will quantity demanded of your website fall
if you raise your price
Price Elasticity of Demand
•
Price elasticity of demand
measures how much Q
d
responds to a
change in P
•
Loosely speaking, it measures the pricesensitivity of buyers’
demand.
•
Example and graph on slide 5
o
We treat price elasticity as absolute number, always increase
and decrease in positive number
Calculating Percentage Change
•
Usually
o
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Documento
Using example on slide 6, going from A to B, the percentage
change in P equals 25%
o
Going from B to A is 20%
This is the end of the preview. Sign up
to
access the rest of the document.
 Fall '07
 Yezer
 Economics

Click to edit the document details