Chapter 4 - Elasticity

Chapter 4 - Elasticity - ELASTI CI TY 4 CHAPTER Predicting...

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ELASTICITY 4 CHAPTER
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Predicting Prices How responsive demand and supply are to price and other influences on buying plans and selling plans? Concept of elasticity. How to calculate, interpret, and use elasticity.
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Price Elasticity of Demand Price elasticity of demand: responsiveness of quantity demanded of a good to a change in its price when all other factors remain the same. X product of price in change % X product of demanded quantity in change %
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Price Elasticity of Demand Let store price of bread increase: $1.05 to $1.25 per loaf. Quantity of bread consumed decreases: 100 to 95. % P change: (1.25-1.05)/1.05 = +0.1905 OR +19.05% % Q change: (95-100)/100 = -0.05 OR -5%. Elasticity = (-5%/19.05%) = -0.26 Absolute value: 0.26 A 1% increase in ‘P’ leads to 0.26% decrease in ‘Q’.
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Let price of leather jackets increase: $300 to $350. Quantity purchased decrease: 90 to 65. % P change: (350-300)/300 = +0.167 OR +16.7% % Q change: (65-90)/90 = -0.278 OR –27.8%. Elasticity = (-27.8%/16.7%) = -1.66
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Chapter 4 - Elasticity - ELASTI CI TY 4 CHAPTER Predicting...

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