ch3 - Econ 106 Class notes Chapter 3: Quantitative Demand...

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Econ 106 Class notes Chapter 3: Quantitative Demand Analysis A. Price Elasticity of Demand 1. Motivation 2. Calculating Elasticity of Demand. a. Arc Price Elasticity. E Qx,Px = (Q 1 - Q 0 )(P 1 + P 0 ) / 2 (Q 1 + Q 0 )(P 1 - P 0 ) / 2 c. Percentage changes. E Qx,Px = (%changeQ) / (%changeP) b. Point price elasticity. E Qx,Px = (dQ/dP)(P/Q) 3. A Graphical Interpretation of Price Elasticity. 1
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4. Some Observations about Price Elasticity of Demand i.inelastic let price increase from $1 to $3 ii. elastic let price drop from $5 to $4 Total revenue test Inelastic TR moves with P Price change > Qty change Ε Qx,Px <1 Unitary TR is Unchanged Price change = Qty. change Ε Qx,Px =1 Elastic TR moves with Q Price change < Qty. change Ε Qx,Px >1 $3 Quantity 0 Price 80 Revenue = $240 Demand $1 Demand Quantity 0 Revenue = $100 100 Price Demand Quantity 0 Price $5 20 Demand Quantity 0 Price Revenue = $200 $4 50 Revenue = $100 2
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5. Elasticity TR and MR a. Motivation b. Relation between MR, TR, and Ε Qx,Px 6. Determinants of Price elasticity
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ch3 - Econ 106 Class notes Chapter 3: Quantitative Demand...

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