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Chapter 5: Elasticity
Price Elasticity of Demand
Elasticity: measures the sensitivity of one market variable to another
Price elasticity of demand: measures the sensitivity of quantity demanded to the price of
the good itself
Measure it by the slope or steepness
Flatter the demand curve greater sensitivity
A. Problems with Slope
1. Slope depends on the units of measurement
2. Slope doesn’t tell us about the significance of a change in price or quantity
B. Elasticity Approach
price elasticity of a demand (Ed) for a good is the percentage change in quantity
demanded divided by the percentage change in price:
Ed= % change in Qd/ % change in Price
price elasticity of demand tells us the percentage change in uantity demanded for
each 1 % change in price
the greater the elasticity value. The more sensitive quantity demanded to price
C. Calculating Price Elasticity
when determining elasticity, we calculate the percentage change in variable using
the midpoint formula: the change in the variable divided by the average of the old
and new values.
% change in price= (P1P0)/ [(P1+P0)/2]
% change in Qd: (Q1Qo) / [Q1+Qo)/2]
ex: ( 125)
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View Full DocumentD. Categorizing Demand
graphs (126)
Perfectly inelastic Demand: Price elasticity of demand = 0
Inelastic Demand: price elasticity of demand between 0 and 1
Elastic Demand: price elasticity of demand greater than 1
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 Spring '12
 Lieberman
 Economics, Price Elasticity

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