Chp2

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Unformatted text preview: tity demanded responds only slightly to changes in the price. 2.5.1 Price Elasticity of Demand 2.5.1 Elasticity A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. 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, computed as the percentage change in quantity demanded divided by the percentage change in price Determinants Determinants Availability of Close Substitutes Necessities versus Luxuries sugar vs chocolate Definition of the Market butter vs margarine, eggs E (narrowly defined market) ≥E (broadly defined market) food vs icecream Time Horizon gas Computing the Price Elasticity of Demand Computing Percentage change in quantity demanded Price elasticity of demand = Percentage change in price E= (⊿Q/Q) / (⊿P/P) = ⊿Q/⊿P * P/Q = dQ/dP * P/Q E.G., a 10 percent increase in the price of a chocolate causes the amount of chocolate you buy to fall by 20 percent. We can calculate your elasticity of demand as: 20% Pri...
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This note was uploaded on 12/06/2011 for the course BUSINESS Finance taught by Professor Qiuxin during the Summer '11 term at Nanjing University.

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