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chap 7a - Chapter 7A Elasticity Taxation and Resource...

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10/4/2010 1 Chapter 7A Elasticity, Taxation, and Resource Allocation (Elasticity section only for 7A. Taxation and Resource Allocation in 7B.) Learning objectives ` 1. Define and measure price elasticity of demand and price elasticity of supply ` 2 D t i th l ti hi b t i l ti it 2. Determine the relationship between price elasticity of demand and total revenue ` 3. Understand the factors that determine elasticity of demand and elasticity of supply
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10/4/2010 2 Changes in Q d C P P Consumers are less responsive to a change in price Consumers are more responsive to a change in price Q Q D D Price elasticity of demand ` Price elasticity of demand measures the responsiveness of consumers to a change in price ` When consumers are more responsive to a change in price When consumers are more responsive to a change in price, demand is “more elastic” (flatter demand) ` When consumers are less responsive to a change in price, demand is “less elastic” (steeper demand)
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10/4/2010 3 Formula for price elasticity of demand % d d Q Δ % P ε = Δ Ranges of elasticity ` Elastic ` % change in Q d > % change in P (in absolute value) 1 d ε > ` Inelastic ` % change in Q d < % change in P (in absolute value) ` Unit elastic % h i Q d % h i P (i b l t l ) 1 d ε = 1 d ε < ` % change in Q = % change in P (in absolute value)
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