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Ch 4 Elasticity

# Ch 4 Elasticity - Elasticity Chapter 4 1 Elasticity...

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Elasticity Chapter 4 1

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Elasticity Elasticity: measure of responsiveness If you change something such as the price, how does the quantity respond 2 P P Q Q D D
Price Elasticity of Demand Price Elasticity of Demand : A measure of the responsiveness of the quantity demanded to a price change Can we use the slope of the line? No, the slope will always be based on the unit of measurements of the quantity; i.e. Slope = - \$5 / 2 pizzas Will results in an invalid comparison across different goods We want a measurement that is independent of the units of measurement 3

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Price Elasticity of Demand Units of measurement vary so we need “unit- free” measure → Use percentage changes: %∆Q d %∆P Starting point→ Use percentage changes Price Elasticity of Demand = (ε d ) = %∆Q d %∆P *** Will need to know this formula for exam*** 4
Price Elasticity of Demand 5 3 Ranges ε d > 1 → > 1 → > → “elastic” demand ε d < 1 → < 1 → < → “inelastic” demand ε d = 1 → = 1 → = → “unit elastic” demand P % Qd % Qd % P % P % Qd % Qd % P % P % Qd % Qd % P %

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Price Elasticity of Demand 6 Calculating Percentage Changes Base = = average Qd Base = = average P = = = cont next slide % 2 SumQd 2 SumQd P % Qd % avgP P avgQd Qd 2 2 SumP P SumQd Qd
Price Elasticity of Demand 7 = = = ε d = SumP P SumQd Qd P SumP SumQd × Qd SumQd SumP P × Qd SumQd SumP slope × 1

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Price Elasticity of Demand Example: Qd = -1/2 *P + 6 What is ε d ?
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Ch 4 Elasticity - Elasticity Chapter 4 1 Elasticity...

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