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Unformatted text preview: • Note that the definition of elasticity is an equation of the form E=A/B where A is percent change in Quantity and B is percent change in Price. If we know any two of these variables, we can always calculate the third. In our previous example: We are told that E=0.5. We are told that A=( % change in quantity) = –20 We need to solve for B= (% change in price). • Since by definition E=A/B We have –0.5=20 /B. We solve this equation to find B=40. The supply curve is horizontal at $10. If the supply curve shifts downward to $5 and if the price elasticity of demand is 1.5, then equilibrium sales increase by 1. 100% 2. 50% 3. 75% 4. 25% $10 $5 P Q Price falls by 50%, from $10 to $5. If price elasticity is 1.5, then (% change in quantity) divided by (% change in price) =1.5. So % change in quantity =75. Supply curve shifts down....
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This note was uploaded on 12/25/2011 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.
 Fall '07
 Bergstrom

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