Lecture_Notes_3 - A CLOSER LOOK AT MARKETS Elasticities of...

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A CLOSER LOOK AT MARKETS Elasticities of Demand and Supply CHAPTER 3
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3.1 THE PRICE ELASTICITY OF DEMAND Price elasticity of demand It is a measure of the extent to which the quantity demanded of a good changes when the price of the good changes. To determine the price elasticity of demand, we compare the percentage change in the quantity demanded with the percentage change in price.
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3.1 THE PRICE ELASTICITY OF DEMAND Percentage Change in Price Percent change in price = New price – Initial price Initial Price x 100 Percent change in price = $5 – $3 $3 x 100 = 66.67 percent Suppose Starbucks raises the price of a latte from $3 to $5 a cup. What is the percentage change in price?
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3.1 THE PRICE ELASTICITY OF DEMAND Suppose Starbucks cuts the price of a latte from $5 to $3 a cup. What is the percentage change in price? Percent change in price = New price – Initial price Initial Price x 100 Percent change in price = $3 – $5 $5 x 100 = – 40 percent
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3.1 THE PRICE ELASTICITY OF DEMAND The same price change, $2, over the same interval, $3 to $5, is a different percentage change depending on whether the price rises or falls. We need a measure of percentage change that does not depend on the direction of the price change. We use the average of the initial price and the new price to measure the percentage change.
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3.1 THE PRICE ELASTICITY OF DEMAND The Midpoint Method x 100 Percent change in price = New price – Initial price (New Price + Initial Price) ÷ 2 To calculate the percentage change in the price divide the change in the price by the average price and then multiply by 100. The average price is at the midpoint between the initial price and the new price, hence the name midpoint method.
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3.1 THE PRICE ELASTICITY OF DEMAND The percentage change in price calculated by the midpoint method is the same for a price rise and a price fall. x 100 Percent change in price = $5 – $3 ($5 + $3) ÷ 2 Percent change in price = 50 percent
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3.1 THE PRICE ELASTICITY OF DEMAND Percentage Change in Quantity Demanded x 100 Percent change in quantity = New quantity – Initial quantity (New quantity + Initial quantity) ÷ 2
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This note was uploaded on 06/21/2011 for the course ECON 201 taught by Professor Staff during the Spring '08 term at Northern Virginia Community College.

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Lecture_Notes_3 - A CLOSER LOOK AT MARKETS Elasticities of...

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