ECON-251 Lecture3

ECON-251 Lecture3 - Lecture Outline Chapter 2: cont. h...

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Lecture Outline Chapter 2: cont. h Elasticities Chapter 3:
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Supply and Demand cont. Chapter 2
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Elasticities of Supply and Demand Linear Demand Curve The price elasticity of demand depends not only on the slope of the demand curve but also on the price and quantity. The elasticity, therefore, varies along the curve as price and quantity change. Slope is constant for this linear demand curve. Near the top, because price is high and quantity is small, the elasticity is large in magnitude. The elasticity becomes smaller as we move down the curve.
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Calculating Percentage Changes 0 P Q D $250 8 B $200 12 A Demand for your websites Standard method of computing the percentage (%) change: end value – start value start value x 100% Going from A to B, the % change in P equals ($250–$200)/$200 = 25%
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Calculating Percentage Changes 0 P Q D $250 8 B $200 12 A Demand for your websites Problem : The standard method gives different answers depending on where you start. From A to B, P rises 25%, Q falls 33%, elasticity = 33/25 = 1.33 From B to A, P falls 20%, Q rises 50%, elasticity = 50/20 = 2.50
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Calculating Percentage Changes midpoint method : (arc elasticity) 0 end value – start value midpoint x 100% The midpoint is the number halfway between the start & end values, the average of those values. It doesn’t matter which value you use as the “start” and which as the “end” – you get the same answer either way!
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Calculating Percentage Changes Using the midpoint method, the % change in P equals 0 $250 – $200 $225 x 100% = 22.2% The % change in Q equals 12 – 8 10 x 100% = 40.0% The price elasticity of demand equals 40/22.2 = 1.8 We will still use the former (point elasticity), unless otherwise stated.
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What determines price elasticity? To learn the determinants of price elasticity, we look at a series of examples. Each compares two common goods. In each example: e Suppose the prices of both goods rise by 20%. e The good for which Q d falls the most (in percent) has the highest price elasticity of demand. Which good is it? Why? e What lesson does the example teach us about the determinants of the price elasticity of
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EXAMPLE 1: Breakfast cereal vs. Sunscreen The prices of both of these goods rise by 20%. For which good does Q d drop the most? Why? e Breakfast cereal has close substitutes ( e.g ., pancakes, Eggo waffles, leftover pizza), so buyers can easily switch if the price rises. e Sunscreen has no close substitutes, so consumers would probably not buy much less if its price rises.
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EXAMPLE 2: “Blue Jeans” vs. “Clothing” The prices of both goods rise by 20%. For which good does Q d drop the most? Why?
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This note was uploaded on 09/29/2011 for the course ECON 251 at USC.

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ECON-251 Lecture3 - Lecture Outline Chapter 2: cont. h...

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