Section_Three-elasticity_08

# Section_Three-elasticity_08 - Section Three Section...

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Section Three Section Three Elasticities Elasticities

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We have now discussed how quantity demanded will increase or decrease in response to prices going down or up. Suppliers, of course, would be very interested to know how drastically consumers would respond to various price changes.
For example, suppliers may want to know if, by cutting prices, they could actually make more money due to the increased quantity sold/demanded or if it would just result in lower revenue figures.

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On the flip side, if they decide to increase prices, will they lose so many sales (decreased quantity demanded) that they decrease total revenue? Or would consumer response be small enough that higher prices would result in higher total revenue?
The measure used to calculate these matters is called the price elasticity of demand . Defined: measure of responsiveness of quantity demanded to changes in price. To calculate: to calculate the price elasticity of demand for a product, you need to divide the percentage change in quantity demanded by the percentage change in the price…

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Let’s take a closer look at what that means… To discuss this more easily, let’s use some abbreviations… E d =price elasticity of demand Qd=Quantity demanded – Qd 1 =initial quantity demanded – Qd 2 =quantity demanded after the change in price P= Price – P 1 =initial price – P 2 =price after the price change
To calculate the price elasticity of demand, |(Qd 1 -Qd 2 )| (Qd1+Qd2) E d = |(P 1 -P 2 )| (P 1 +P 2 ) 2 These straight lines mean “absolute value” which means that you use the positive value of whatever number you come up with…disregard any negative result and just use the number. 2

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Looks like a really big mess, doesn’t it? Let’s break it down a bit…
|(Qd 1 -Qd 2 )| (Qd1+Qd2) E d = |(P 1 -P 2 )| (P 1 +P 2 ) 2 2 This row just asks you to calculate the change in the quantity demanded. How many units difference was there after the price change? This row asks you to calculate the average of the quantities demanded. Add the quantity before the price change to the quantity after the price change and divide by two Once you calculate these two figures, you divide them. That is your percentage change in quantity demanded.

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## This note was uploaded on 03/12/2011 for the course ECON 2011 taught by Professor Deluth during the Fall '08 term at University of Minnesota Morris.

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Section_Three-elasticity_08 - Section Three Section...

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