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5_Elasticity

5_Elasticity - Elasticities of Demand and Supply CHAPTER 5...

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Elasticities of Demand and Supply CHAPTER 5

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When you have completed your study of this chapter, you will be able to C H E C K L I S T Define, explain the factors that influence, and calculate the price elasticity of demand. 1 Define, explain the factors that influence, and calculate the price elasticity of supply. Define and explain the factors that influence the cross elasticity of demand and the income elasticity of demand. 2 3
Elasticity in General elasticity A general concept used to quantify the response in one variable when another variable changes. B A B A = % % respect to with of elasticity

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5.1 THE PRICE ELASTICITY OF DEMAND Price elasticity of demand A measure of the extent to which the quantity demanded of a good changes when the price of the good changes. price in change % demanded quantity in change % demand of elasticity price =
5.1 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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5.1 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 = \$3 – \$5 \$5 x 100 = – 40 percent
5.1 THE PRICE ELASTICITY OF DEMAND Problem: 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. Solution: We use the average of the initial

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5.1 THE PRICE ELASTICITY OF DEMAND The Midpoint Method 100% x 2 / ) ( demanded quantity in change demanded quantity in change % 2 1 Q Q + = 100% x 2 / ) ( - 2 1 1 2 Q Q Q Q + = 100% x 2 / ) ( price in change price in change % 2 1 P P + = 100% x 2 / ) ( - 2 1 1 2 P P P P + =
5.1 THE PRICE ELASTICITY OF DEMAND The Midpoint Method price in change % demanded quantity in change % demand of elasticity price = Then we replace the % changes in the formula below with those in the previous slide to finish the calculations.

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5.1 THE PRICE ELASTICITY OF DEMAND Note: Price and quantity always change in opposite directions. Therefore the elasticity of demand is always a negative number. So, for simplicity, we can ignore the minus sign and use the absolute values.
5.1 THE PRICE ELASTICITY OF DEMAND Computing the Price Elasticity of Demand If the price elasticity of demand is greater than 1, demand is elastic. If the price elasticity of demand equals 1, demand is

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5_Elasticity - Elasticities of Demand and Supply CHAPTER 5...

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