2.8.10, Lecture Notes, ECON 201

# 2.8.10, Lecture Notes, ECON 201 - 2.8.10 Lecture Notes ECON...

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2.8.10, Lecture Notes, ECON 201 ELASTICITY APPLICATIONS Elasticity: Measure of responsiveness of quantity demanded or quantity supplied to changes in prices of income Price Elasticity of Demand: Percentage change in Q. Demanded Percentage Change in Price - Elastic o P x Q falls as price increases o P x Q rises as price decreases - Inelastic o P x Q rises as price increases o P x Q falls as price decreases - Unit Elastic o P x Q constant as price increases and as price decreases - Perfectly Inelastic o Demand curve vertical – Quantity Constant - Perfectly Elastic o Demand curve horizontal – Price Constant “ARC” MEASURE OF PRICE ELASTICITY - Change in quantity and price relative to average quantity and average price E = (Q1 – Q2) / [(Q1 + Q2)]/2 (P1 – P2) / [(P1 + P2)]/2 Price Elasticity of Demand Example: P1 = 2.00 P2 = 1.75 USE FORMULA ABOVE TO SOLVE. Q1 = 20 Q2 = 30 As number gets bigger, elasticity gets higher. ELASTICITY AND LINEAR DEMAND

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2.8.10, Lecture Notes, ECON 201 - 2.8.10 Lecture Notes ECON...

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