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Unformatted text preview: Chapter 5 Elasticity (responsiveness) Price elasticity of demand= Percentage change in Qd/Percentagechange inP Measures how much Quantity demanded responds to the price Calculating percentage change. End value start value /start value. X 100 We use MIDPOINT METHOD: end value start value/midpoint x 100 What determines price elasticity? o Breakfast cereal vs Sunscreen o The prices of both of these goods rise by 20%. For which good does Qd drop the most? Why o Sunscreen has no close substitutes, so consumers would probably not buy much less Price elasticity is higher when close substitutes are available. o Blue jeans vs clothing. o Qd drops the most for blue jeans. Price elasticity is higher for narrowly defined goods than broadly defined ones. o Insulin vs. Caribbean Cruises Demand for necessities is inelastics. While demand for luxuries is very elastic/ responsive o Gas in the short run vs gas in the long run o Theres not much people can do in the short run, other than ride the bus or...
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