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Unformatted text preview: sticity of demand(Cont
(Own) price elasticity of demand(Cont.)
• 1, elastic
1 , inelastic
1 , unit elastic
unit elastic • Elasticity &Expenditure(Revenue)
( p Q)
( p Q)
17 Cross price elasticity of demand
Cross price elasticity of demand
• QX / QX
pY / pY
pY QX XY>0 means X and Y are substitutes.
XY<0 means X and Y are complements. 18 Income elasticity of demand
All in percentage I •
IQ I<0 inferior good
I>0 normal good 19 3. Decomposition of price effect
Decomposition of price effect
• Price effect: The effect of price change on a
• Two effects of price change (increase)
– Substitution effect: relative price change
effect relative price change
– Income effect: less purchasing power • Why decompose? 20 • Suppose p0 rises to p1 (Normal goods) C B A Inc. U0 Sub.
Total x1 xCV U1
x0 I / P
1 I’ / P1 I0 / P0 Good x 21 • Substitution effect : always negative
– As price goes up (down), the demand reduces
price goes up (down) the demand reduces
(increases). • In...
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