Chapter 5

Chapter 5 - changes in the price. When demand is perfectly...

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Chapter 5: Elasticities - Price Elasticity of Demand: o Price elasticity of demand compares the percent change in quantity demanded to the percent change in price as we move along the demand curve. o To calculate the price elasticity of demand, we must first calculate the percent change in the quantity demanded and the corresponding percent change in the price as we move along the demand curve % change in quantity demand = ( change in quan demanded/ initial quan demanded) X 100 % change in price = ( change in price / initial price) X 100 Then take these two numbers and plug them into the price elasticity equation Price elasticity of demand = ( % change in quan demanded / % change in price) - Types of Elasticities o Perfectly inelastic-- when the quantity demanded does not respond at all to
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Unformatted text preview: changes in the price. When demand is perfectly inelastic the demand curve is vertical o Perfectly Elastic-- when any price increase will case the quantity demanded to drop to zero. Demand curve will be horizontal o Elastic-- if the price elasticity of demand is greater than 1 o Inelastic if the price elasticity of demand is less than 1 o Unit-elastic -- if the price elasticity of demand is exactly 1 o Cross-price elasticity of demand defined as the ration of the percent change in the quantity demanded of one good to the percent change in the price of the other CPEoD = ( % change in quan of A demanded / % change in price of B) o Vice versa for elasticitys of supply...
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