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microbook_3e-page47 - milk the demand relationships are...

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What is elasticity? x it’s a unit-free measure of responsiveness x the own price elasticity of demand measures the ratio of a percentage change in quantity demanded of good X to a percentage change in the price of good X Q P ǻ P ǻ Q P ǻ P Q ǻ Q ǻ P age - % ǻ Q age - % İ ¡ x notice that the component ǻ P ǻ Q corresponds to the slope of a demand function such as: 2P 10 Q D 0 , in which case: 2 ǻ P ǻ Q 0 x ǻ P ǻ Q is also the inverse of the slope of the demand curve (when we plot price on the vertical axis and quantity of the horizontal axis) x the component Q P corresponds to the current price of the good and the quantity that consumers buy at that price Milk Example – Dollars vs. Pounds x As illustrated in the graphs of British and American demand for
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Unformatted text preview: milk, the demand relationships are: Dollar U.S America D, P 10 Q Pound British Britain D, 2P 10 Q x therefore: 1 ǻ P ǻ Q Dollar U.S. America D, 2 ǻ P ǻ Q Pound British Britain D, x If 6 Q Q Britain D, America D, , then: 4 P Dollar U.S and 2 P Pound British x So the own-price elasticities of demand in each country must be: 3 2 İ Q P ǻ P ǻ Q İ U.S. America D, Dollar U.S. Dollar U.S. America D, U.S. ¡ 2/3 İ Q P ǻ P ǻ Q İ Britain Britain D, Pound British Pound British Britain D, Britain ¡ x How much less milk would be demanded in each country if the price rose 1% in each country? 0.67% less Page 47...
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