08 Elasticity

08 Elasticity - Elasticity 2/17/11 11:58 PM A Scenario You...

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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 price-sensitivity 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
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o 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%
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08 Elasticity - Elasticity 2/17/11 11:58 PM A Scenario You...

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