Lecture 5 - Lecture 5. Elasticity and its applications In...

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Elasticity and its applications In this section you will learn The concept of elasticity Demand elasticity o Price elasticity o Relationship between price elasticity and total revenue o Cross price elasticity and income elasticity Elasticity of Supply Applications 1. WHAT IS ELASTICITY? It is a measure of how sensible quantity demanded or quantity supplied is to changes in one of its determinants. In general, elasticity is a number that measures the responsiveness of a dependent variable to changes in another related variable. For instance, if y = f(x), then we are interested in measuring how “y” responds to given changes in “x”. To be more precise, it would be very convenient to focus on the Elasticity of Demand 2. ELASTICITY OF DEMAND 2.1. Price Elasticity of Demand and its determinants Recall that the law of demand says that a fall in the price of a good raises the quantity demanded, ceteris paribus. What determines the price elasticity of demand? There are basically four reasons: the availability of close substitutes, necessities versus luxuries, the definition of the market and the time horizon. The price elasticity of demand measures the percentage change in quantity demanded of a good due to a 1% change in the price of the good, ceteris paribus. Formally,
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This note was uploaded on 04/07/2008 for the course BSAD ECON 040 011 taught by Professor Boveemora during the Spring '08 term at Vermont.

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Lecture 5 - Lecture 5. Elasticity and its applications In...

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