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Chapter 5

# Chapter 5 - ECON 2106 Prof Byung-Cheol Kim THE ELASTICITY...

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ECON 2106 Prof. Byung-Cheol Kim

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THE ELASTICITY OF DEMAND The is a measure of how much the quantity demanded of a good responds to a change in the price of that good. When we talk about , the responsive- ness is always measured in terms. Specifically, is the percentage change in quantity demanded due to a percentage change in the price.
Computing the Price Elasticity of Demand Example: If the price of an ice cream cone increases from \$2.00 to \$2.20 and the amount you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as: P r i c e e l a s t i c i t y o f d e m a n d = P e r c e n t a g e c h a n g e i n q u a n t i t y d e m a n d e d P e r c e n t a g e c h a n g e i n p r i c e ( ) ( . . ) . 1 0 8 1 0 1 0 0 2 2 0 2 0 0 2 0 0 1 0 0 2 0 % 1 0 % 2 - × - × = =

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A Different Way to Calculate the Elasticity !? If we measure a bit differently (focusing the quantity of demanded and the price after the price change), your elasticity of demand would be calculated as: 74 . 2 % 1 . 9 % 25 100 20 . 2 ) 00 . 2 20 . 2 ( 100 8 ) 8 10 ( = = × - × -
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the price change. 2 1 2 1 2 1 2 1 ( ) /[( ) / 2] Price elasticity of demand = ( ) /[( ) / 2] Q Q Q Q P P P P - + - + (10 8) 22% (10 8) / 2 2.32 (2.20 2.00) 9.5% (2.00 2.20) / 2 - + = = - +

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The Price Elasticity of Demand and Its Determinants Demand tends to be more elastic: the larger the number of close substitutes. Salad dressings vs. GT football ticket, your examples? if the good is a luxury. Yacht vs. Groceries, you examples? the more narrowly defined the market. Office supplies market (Big 3 vs. Big3+all), your examples? the longer the time period. Monthly  Yearly, your examples?
The Variety of Demand Curves Inelastic Demand Quantity demanded does not respond strongly to price changes. Demand curve looks steep .

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