IE 545 Session 22

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Unformatted text preview: ( TE reduces) What do PD curves look like for these cases? “TRICK” - Note that TR = area of rectangle to the left and below a point on the PD curve. 10 9 8 7 TR = P1*D1 D 6 5 4 3 A =(P1,D1) P1 2 1 D1 0 0 1 2 3 4 5 6 7 8 9 10 P Case 1: Demand is Elasti c ( E >1) TRA and TRB both have area2 in common and area1 < area3. Hence, the demand is elastic. 10 9 8 Relatively flat horizontal 7 A D 6 5 1 4 3 3 2 1 0 B 2 0 1 2 3 4 5 P 6 7 8 9 10 Session 22 IE 545 Fall 2013 Scribe: Parithi Govindaraju Case 2: Uninform Elasticity (E=1) area1 = area3 . TR remains the same 10 9 8 Rectangular hyperbola 7 D 6 A 5 1 4 3 B 2 2 1 0 0 3 1 2 3 4 5 6 7 8 9 10 P Case 3: Demand is Inelastic (E<1) area1 > area3 and both TR’s have area2 in common. TR decreases in this case 10 9 8 Relatively steep vertical 7 D 6 A 5 1 4 B 3 3 2 2 1 0 0 1 2 3 4 5 6 7 8 9 10 P Two Extreme Cases Case 4: Total (perfect) Inelasticity (E=0) Demand remains the same, no matter what the price (Ex. Table salt) 10 9 8 7 D 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 P Session 22 IE 545 Fall 2013 Scribe: Parithi Govindaraju Case 5: Total (infinite) Elasticity (E is infinite) Price remains same, whatever the demand 10 9 8 7 D 6 5 4 3 2 1 0 0 1 2 3 4 5 6 7 8 9 10 P Calculation of ARC Elasticity Between 2 points A and B, on our PD curve ΔD −% Change in Demand −100 D − P ΔD − P dD E= = = = ΔP % Change in Price D ΔP D dP 100 P dD is the inverse of the slope of the curve at that point. This is why a LINEAR PD curve does not have dP P constant elasticity (E), slope is constant but varies at each point. D...
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This document was uploaded on 11/21/2013.

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