Chapter 6 Note

# Chapter 6 Note - Economics Microeconomics Macroeconomics...

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1 1 Economics Microeconomics Macroeconomics Sixth EDITION William Boyes / Michael Melvin Arizona State University 2 Chapter 6 Elasticity: Demand and Supply 3 Price Elasticity of Demand • How sensitive is the quantity demanded to changes in price? How responsive are consumers to price changes?

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2 4 Definitions of Price Elasticity of Demand • The percentage change in the quantity demanded of a product divided by the percentage change in the price of the product. • The percentage change in the quantity demanded caused by a one percent change in the price. 5 Price Elasticity: Mathematical Definition • The price elasticity of demand, e d ,is : • Example: if the quantity of videotapes rented falls by 3% when the price is raised by 1%, then the price elasticity of demand is 3/1 = 3. P Q e D d Δ Δ = % % 6 DEMAND LAW OF DEMAND LAW OF DEMAND ….. decreases as the price of that .. decreases as the price of that good or service rises and increases good or service rises and increases as the price falls, ceteris paribus as the price falls, ceteris paribus …so price elasticity of demand is always negative but to avoid confusion,
3 7 Defining elasticities • When price elasticity is between zero and -1 we say demand is inelastic . • When price elasticity is between -1 and - infinity, we say demand is elastic . • When price elasticity is -1, we say demand is unit elastic . 8 Demand Curve Shapes and Elasticity • Perfectly Elastic Demand Curve –The demand curve is horizontal. –Even the smallest change in price will cause consumers to change their consumption by a huge amount. • Perfectly Inelastic Demand Curve –The demand curve is vertical. –The quantity demanded is totally unresponsive to the price. Changes in price have no effect on consumer demand. 9 Demand Curve Shapes and Elasticity

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4 10 Price Elasticity Along a Straight Line Demand Curve • The price elasticity of demand changes as we move up or down a straight-line demand curve. The price elasticity becomes more inelastic as we move down the curve. • If an entire demand curve (D2) is more
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Chapter 6 Note - Economics Microeconomics Macroeconomics...

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