Lecture_5_handout - EC1301 Principles of Economics Week 5...

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Lim Boon Tiong, Dept of Economics, NUS 1 EC1301 Principles of Economics Week 5
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Lim Boon Tiong, Dept of Economics, NUS 2 Elasticity: a measure of responsiveness Textbook, Chapter 20
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Lim Boon Tiong, Dept of Economics, NUS 3 Demand for widgets: Change in the price of widgets: Δ P Change in the quantity demanded: Δ Q ceteris paribus For the individual buyer, the sum of income effect and substitution effect
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Lim Boon Tiong, Dept of Economics, NUS 4 THE PRICE ELASTICITY OF DEMAND price elasticity of demand ( E d ) A measure of the responsiveness of the quantity demanded to changes in price Defined as the absolute value of the percentage change in quantity demanded divided by the percentage change in price. d Q Q E P P Δ = Δ
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Lim Boon Tiong, Dept of Economics, NUS 5 Two points to note of the definition: The measure is defined with respect to a point on the demand curve Change from where? Different value for different percentage change Is the measure well-defined? A “derivative” concept The shape of the demand curve around the point on the demand curve we are looking at P P Δ Change in the price of widgets: Δ P Change in the quantity demanded: Δ Q ceteris paribus Q Q Δ
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Lim Boon Tiong, Dept of Economics, NUS 6 Computing Price Elasticity Suppose we observe two points: Demand for Pizzas 0 2 4 6 8 10 12 0 3 6 9 12 15 18 Thousands of Pizzas per month $ per Pizza Initial New 0 0 Initial-value Method: 3 3 12 2 4 6 d Q Q E P P Δ == = Δ Price Quantity Price Quantity Initial 61 2 New 89 Absolute Change in 23 () Mid-Point Method : 3 12 9 2 1 2 68 2 d Q Q E P P + Δ = Δ +
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Lim Boon Tiong, Dept of Economics, NUS 7 Demand Curve and Price Elasticity Consider two demand curves: A (last slide) and B •Suppose the current price is $6, quantity demanded is 12 •Question : –What is the price elasticity, if the demand curve is A ? If B ? •Assume price rises to $8. Quantity Demanded Price A B 10 6 4 8 9 8 6 12 12 4 15 16 2 18 20 initial-value Using , method 3 4 1 A d B d E E = =
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Lim Boon Tiong, Dept of Economics, NUS 8 Demand Curve and Price Elasticity Demand for Pizzas 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Thousands of Pizzas per month $ per Pizza Demand Curve A Demand Curve B Initial we say that Demand A is inelastic when price is 6 3 Since 1, 4 A d E =< Demand B is unit elastic when price is 6 If price elasticity is greater than one , then we say the demand is elastic .
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Lim Boon Tiong, Dept of Economics, NUS 9 Price Elasticity and the Demand Curve FIGURE 20.1 Elasticity and Demand Curves perfectly elastic demand The price elasticity of demand is infinite.
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