Ch 5 Elasticity bb

# Example most manufactures copyright 2006 nelson a

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Example: most manufactures.

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Elastic Demand P D Q The change in Q is proportionally bigger than the change in P.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Perfectly Inelastic Demand Quantity demanded does not respond to price  changes at all. Ep = 0 The demand curve is vertical. Example: prescription heart medication. If you  need it to stay alive, price is not even an issue.

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Perfectly Inelastic Demand D P Q Q doesn’t change for any size change in P.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Perfectly Elastic Demand Quantity demanded changes infinitely with any  change in price. Ep => infinity The demand curve is horizontal. Example: wheat. If a supplier raises her price,  you’ll find a cheaper supplier because wheat is  wheat – she won’t sell any wheat, so she faces a  perfectly elastic demand for her wheat .

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Perfectly Elastic Demand D P Q At any P above P*, demand is 0. At any P below P*, demand is infinite. P*
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Unit Elastic Quantity demanded changes by the same  percentage as the price Ep = 1 The demand curve is non-linear. Example: none really exist, so think of unit  elasticity as simply a dividing point between  elastic and inelastic.

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Unit Elastic Demand D P Q The change in P leads to the same proportionate change in Q.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. NOTE: The more price - elastic the demand for a  good, the flatter the demand curve will be.

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Calculating Elasticity If we are given percentage changes in price and  the corresponding changes in Qd, we use the  formula       Ep =     %  in Qd                         %  in P For example,    The price of milk increases by 2% and Qd  decreases by .5%            Ep = -.5/2 = -.25
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Another formula we use is the  midpoint   formula . The midpoint formula is preferable when  calculating the price elasticity of demand  because it gives the same answer regardless of  the direction of the change. We use it when we are given two prices and their  corresponding Qd values.

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