elasticity

elasticity - ELASTICITY Elasticity is the concept...

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Elasticity slide 1 ELASTICITY Elasticity is the concept economists use to describe the steepness or flatness of curves or functions. In general, elasticity measures the responsiveness of one variable to changes in another variable.
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Elasticity slide 2 PRICE ELASTICITY OF DEMAND Measures the responsiveness of quantity demanded to changes in a good’s own price. The price elasticity of demand is the percent change in quantity demanded divided by the percent change in price that caused the change in quantity demanded.
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Elasticity slide 3 FACTS ABOUT ELASTICITY It’s always a ratio of percentage changes. That means it is a pure number -- there are no units of measurement on elasticity. Price elasticity of demand is computed along a demand curve. Elasticity is not the same as slope.
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Elasticity slide 4 LOTS OF ELASTICITIES! THERE ARE LOTS OF WAYS TO COMPUTE ELASTICITIES. SO BEWARE! THE DEVIL IS IN THE DETAILS. MOST OF THE AMBIGUITY IS DUE TO THE MANY WAYS YOU CAN COMPUTE A PERCENTAGE CHANGE. BE ALERT HERE. IT’S NOT DIFFICULT, BUT CARE IS NEEDED.
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Elasticity slide 5 What’s the percent increase in price here because of the shift in supply? p E = $2 Q E S D Q price S' p E = $2.50 CIGARETTE MARKET
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Elasticity slide 6 IS IT: A) [.5/2.00] times 100? B) [.5/2.50] times 100? C) [.5/2.25] times 100?
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Elasticity slide 7 From time to time economists have used ALL of these measures of percentage change -- including the “Something else”! Notice that the numerical values of the percentage change in price is different for each case: Go to hidden slide
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Elasticity slide 8 A) [.5/2.00] times 100 = 25 percent B) [.5/2.50] times 100 = 20 percent C) [.5/2.25] times 100 = 22.22 percent
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Elasticity slide 9 Economists usually use the “midpoint” formula (option C), above) to compute elasticity in cases like this in order to eliminate the ambiguity that arises if we don’t know whether price increased or decreased.
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Elasticity slide 10 Using the Midpoint Formula Elasticity = % change in p = times 100. % change in p = For the prices $2 and $2.50, the % change in p is approx. 22.22 percent. P in change % Q in change % P average P in change 100 ) P P ( MEAN ×
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slide 11 What’s the percent change in Q due to the shift in supply? p
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This note was uploaded on 01/05/2012 for the course ECON 201 taught by Professor Brown during the Winter '12 term at BYU.

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elasticity - ELASTICITY Elasticity is the concept...

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