Chapter 5 Elasticity

# Chapter 5 Elasticity - Elasticity and Its Application...

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Chapter 5 Elasticity and Its Application

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Price Elasticity of Demand The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that same good, computed as the percentage change in quantity demanded divided by the percentage change in price.
PRICE QUANTITY DEMANDED \$40 250 \$30 450 \$20 675 \$10 825

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Calculating Price Elasticity of Demand Step 1 : Find the numerator , which is the percentage change in quantity demanded Quantity rises from 250 to 450 Change in quantity = 200 Average quantity = (250+450)/2 = 350
Calculating Price Elasticity of Demand Step 2 : Find the denominator , which is the percentage change in price Price falls from \$40 to \$30 Change in price = \$10 Average price = (\$40 + \$30)/2 =\$35

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Calculating Price Elasticity of Demand Step 3 : Form a ratio of the two ratios, numerator over denominator Elasticity = (200/350) / (10/35) = 2.0 Question: should there be a negative sign in front of the calculated elasticity?
PRICE QUANTITY DEMANDED \$40 250 \$30 450 \$20 675 \$10 825

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Price Quantity D P Q 1 1 P 2 Q 2 Inelastic Demand
Price Quantity D P 1 P 2 Perfectly Inelastic Demand Q 1 Q 1 = Q 2

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Price Quantity D P Q 1 1 P 2 Q 2 Elastic Demand
Price Quantity D P 1 P 2 Perfectly Elastic Demand =

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Does time matter? Remember the hypothetical process
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Chapter 5 Elasticity - Elasticity and Its Application...

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