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Chapter 6 - Chapter 6 Elasticity The Responsiveness of...

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Chapter 6 Elasticity: The Responsiveness of Demand and Supply Elasticity- A measure of how much one economic variable responds to changes in another economic variable o Ex. the responsiveness of the quantity demanded of a good to changes in its price is called the price elasticity of demand o The responsiveness of the quantity supplied of a good to changes in its price is called the price elasticity of supply The Price Elasticity of Demand and its Measurement Price elasticity of demand- the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product’s price Measuring the Price Elasticity of Demand Economists use percentage changes when measuring the price of elasticity of demand Price of demand= % change in Qd / % change in P The price elasticity of demand is not the same as the slope of the demand curve The price elasticity of demand is always negative In comparing elasticities, we are usually interested in their relative size so we compare their absolute value Elastic Demand and Inelastic Demand Elastic demand- demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value Inelastic demand - demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value Unit elastic demand- demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value An Example of Computing Price Elasticities The steeper the demand curve inelastic Midpoint Formula We can use the midpoint formula to ensure that we have only one value of the price elasticity of demand between the same two points on a demand curve The midpoint formula uses the average of the initial and final quantities and the initial and final prices Price elasticity of demand= (Q2-Q1)/(Q1+Q2/2) / (P2-P1)/(P1+P2/2) When Demand Curves Intersect, the Flatter Curve is More Elastic Elasticity is not the same thing as slope
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While slope is calculated using changes in quantity and price, elasticity is calculated using percentage changes Polar Cases of Perfectly Elastic and Perfectly Inelastic Demand
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