CH-5 PPT - Chapter5 Elasticity and its Application...

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Elasticity and its Application M icroeconomics P R I N C I P L E S   O F P R I N C I P L E S   O F N. Gregory Mankiw N. Gregory Mankiw Chapter 5
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Price Elasticity of Demand The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.
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PRICE QUANTITY DEMANDED $40 250 $30 450 $20 675 $10 825
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Calculating Elasticity of Demand Quantity rises from 250 to 450 Change in quantity = 200 Average quantity = 350 % change in quantity = (200/350) x 100 Price falls from $40 to $30 Change in price = $10 Average price = $35 % change in price = (10/35) x 100 Elasticity = (200/350)/(10/35) = 2.0
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PRICE QUANTITY DEMANDED $40 250 $30 450 $20 675 $10 825
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Price Quantity D P Q 1 1 P 2 2 Inelastic Demand
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Price Quantity D P 1 P 2 Perfectly Inelastic Demand Q 1 2
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Price Quantity D P Q 1 1 P 2 2 Elastic Demand
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Price Quantity D P 1 P 2 Perfectly Elastic Demand =
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Expenditure = Price x Quantity
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Expenditure = Price x Quantity
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Expenditure = Price x Quantity
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Expenditure = Price x Quantity
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Impact of a Price Increase on Expenditure Inelastic Rises Elastic Falls Unit elastic Constant
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Impact of a Price Increase Price Quantity Expenditure Elasticity Change in Expenditure 2.0 -$3,500 1.0 $0 .3 $5,250
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CH-5 PPT - Chapter5 Elasticity and its Application...

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