Topic02(b)_Elasticity

Topic02(b)_Elasticity - Topic 2(b Elasticity and Demand...

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Topic 2(b) Elasticity and Demand Estimate Dr. Ratna K. Shrestha
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2 Price Elasticity of Demand It measures the percentage change in the quantity demanded of a good that results from a one percent change in price. It is usually a negative number As price increases, quantity decreases As price decreases, quantity increases dP dQ Q P P dP Q dQ P Q E D P = = = % %
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3 Price Elasticity of Demand When E P > 1, the good is price elastic % Q > % P When E P < 1, the good is price inelastic % Q < % P When E P = 1, the good is unit elastic % Q = % P
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4 Price Elasticity of Demand The primary determinant of price elasticity of demand is the availability of substitutes. If many substitute goods are available, then demand is price elastic . For example, if the price of Pepsi increases, we can easily switch to Coke. So the price elasticity of Pepsi is very high. Few substitutes, then demand is price inelastic. For example: Even if the price of food increase, one has to buy food to survive.
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5 Price Elasticity of Demand The availability of substitutes also depends on how we define the market. Ex : Demand for a car (broad market) vs. Toyota Corolla (narrowly market). Obviously demand for a Toyota car is more elastic than the demand for a car. The more inelastic the good, the steeper the demand curve. If the demand is completely elastic, the curve is horizontal.
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6 Completely Elastic Demand D P * Quantity Price E P = - A small increase in price will cause demand to drop off completely.
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7 Completely Inelastic Demand Quantity Price Q * D E P = 0 Even if price increases a lot quantity demanded stays the same at Q*.
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Price Elasticity of Demand: A Case of a Linear Curve In the case of a linear demand curve, will the price elasticity of demand be same at all points along the curve? The answer is NO. This is because E = dQ/dP * P/Q and so even if (dQ/dP) is the same at all points, P/Q is not. As you move downwards along the demand
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This note was uploaded on 05/11/2011 for the course COMM 295 taught by Professor Ratna during the Winter '09 term at UBC.

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Topic02(b)_Elasticity - Topic 2(b Elasticity and Demand...

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