Chap4_2008

# Chap4_2008 - PART II: THE INVISIBLE HAND Chapter 4:...

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PART II: THE INVISIBLE HAND Chapter 4: Elasticity

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Question: Could reducing the supply of illegal drugs such as extra border patrols cause an increase in drug- related burglaries? Assumption: illegal drug users commit crimes to finance their addiction We need to know whether the decrease in supply will actually increase the total expenditure on illegal drugs. Total Expenditure = quantity (Q) * price (P). Need to find out what would happen to equilibrium price and quantity of illegal drugs.
Effect of extra boarder control on drug expenditure P(\$) Q (lb) S’ S D 55 50 40 50 E TE = Q * P TE = 50 * 50 = \$2500 TE’ =55 * 40 = \$2200 E’

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Effect of extra boarder control on drug expenditure P(\$) Q (lb) S’ S D 70 50 50 TE = Q * P TE = 50 * 50 = \$2500 TE’ =70 * 45 = \$3150 45 E E’
Why the difference? The answer lies in the sensitivity or responsiveness of drug demand with respect to its price change We use the price elasticity of demand to measure this kind of sensitivity or responsiveness Elasticity: a measure of the extent to which quantity demanded and quantity supplied respond to variations in price, income, and other factors. We will study different kind of elasticity concepts: price elasticity of demand, income elasticity of demand, and price elasticity of supply, etc.

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Price Elasticity of Demand Intuitively A measure of the responsiveness of the quantity demanded of a good to a change in the price of that good Formally The percentage change in the quantity demanded that results from a 1 percent change in its price Price in Change Percentage Demanded Quantity in Change Percentage
Example The price of pork falls by 2% and the quantity demanded increases by 6%. Then the price elasticity of demand for pork is: 3 % 2 % 6 P in change % Q in change % - = - = = ε

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A more general formula for price elasticity of demand Let P = the current price of a good; Q = the quantity demanded at that price; P = a small change in the current price and Q = the resulting change in the quantity demanded Elasticity = percentage change in quantity / percentage change in price = ( Q/Q)/( P/P)
What is the elasticity of season ski passes? Originally

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## This note was uploaded on 09/17/2011 for the course ECO 108 taught by Professor Wolman during the Spring '08 term at SUNY Stony Brook.

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Chap4_2008 - PART II: THE INVISIBLE HAND Chapter 4:...

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