Midterm 2 - Chapter 5 - Elasticity

Midterm 2 - Chapter 5 - Elasticity - Chapter 5 Chapter name...

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Chapter name Chapter 5 Elasticity and Its Applications
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Chapters 1-2 Study Checklist: Required reading : Chapter 5: whole chapter Online practice quiz questions : Chapter 5: #1-4, 6, 8-9
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Elasticity. . . … allows us to analyze supply and demand with greater precision. … is a measure of how much buyers and sellers respond to changes in market conditions. elasticity is a measure of sensitivity to… Changes in price, income, or the price of related goods. Elasticity measures how _quantity______ changes when these change. Elasticity measures a change in quantity demanded (or supplied) NOT a change demand (or supply), because it is difficult to quantify a shift in a demand (or supply) curve.
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Types of Demand Elasticity: price elasticity When the price changes: how does quantity demanded change? income elasticity When income changes: how does quantity demanded change? cross-price elasticity When the prices of related goods change: how does quantity demanded change?
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Price Elasticity of Demand: Price elasticity of demand: A measure of how much the quantity demanded of a good responds to a change in the price of that good. When we talk about elasticity , that responsiveness is always measured in ____percentage terms %______. We are interested in unit-free proportional changes. When price changes by 1%, how does the percentage of quantity demanded change? Price & 1% & Quantity Demanded, ?% (Law of Demand)
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Computing the Price Elasticity of Demand: The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. h is the Greek symbol called epsilon. P r i c e e l a s t i c i t y o f d e m a n d = P e r c e n t a g e c h a n g e i n q u a n t i t y d e m a n d e d P e r c e n t a g e c h a n g e i n p r i c e r P % Change Q D % Change P =
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Computing the Price Elasticity of Demand: Ex) If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as: ( ) ( . . ) . 1 0 8 1 0 1 0 0 2 2 0 2 0 0 2 0 0 1 0 0 2 0 % 1 0 % 2 - × - × = = P r i c e e l a s t i c i t y o f d e m a n d = P e r c e n t a g e c h a n g e i n q u a n t i t y d e m a n d e d P e r c e n t a g e c h a n g e i n p r i c e
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Interpreting Price Elasticity of Demand: What does it mean if price elasticity of demand is -2? Price & 1% & quantity demand DECREASES by 2% Note : If you compute price elasticity of demand on your own you’ll notice that you should get - 2, not +2! Why? The negative sign is consistent with the law of demand. There’s a negative relationship between price ± quantity demanded. The author states in the book that we simply drop the negative signs. In my opinion this is stupid.
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This note was uploaded on 09/23/2011 for the course ECON 2106 taught by Professor Trandel during the Spring '07 term at UGA.

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Midterm 2 - Chapter 5 - Elasticity - Chapter 5 Chapter name...

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