Economics 100
description
Transcript of Economics 100
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Economics 100Economics 100
Lecture 8
Elasticity
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ElasticityElasticity
Price elasticity of demandCalculating the price elasticity of
demand
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Price Elasticity of DemandPrice Elasticity of Demand
A measure of the responsiveness of the quantity demanded to price holding other things constant
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Price Elasticity of DemandPrice Elasticity of Demand
Figure 5.1 (a) shows the case in which a cut in supply increases total revenue
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Price Elasticity of DemandPrice Elasticity of Demand
Figure 5.1 (b) shows the case in which that same cut in supply decreasestotal revenue
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Price Elasticity of DemandPrice Elasticity of Demand
Whether total revenue increases or decreases with a price change depends on how sensitive the quantity demanded is to a change in price
We would like to derive a measure of that sensitivity...
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Price Elasticity of DemandPrice Elasticity of Demand
The slope of a demand curve is a measure of the responsiveness of the quantity demanded of a good to a change in its price, holding constant all other influences on the quantity demanded
Problem: slope depends on units of measurement!!!!!!!!!! (we cannot compare the demand for pizza and the demand for books!!!)
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Price Elasticity of DemandPrice Elasticity of Demand
Solution: Price elasticity of demandThe price elasticity of demand is the
percentage change in the quantity demanded of a good divided by the percentage change in its price
Elasticity does not depend on units of measurement!!!
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Calculating the Price Elasticity Calculating the Price Elasticity of Demandof Demand
%Q
--------------
%P
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Note for ECON 100Note for ECON 100
IN ECON 100 we will calculate percentages of the average price and average quantity to avoid different numbers for a price rise and price fall
This means that we really calculate the elasticity at a point midway between the equilibrium point before and after the price change. Ideally, we would want to calculate it at a single point, with no approximations…
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%Q Q/ Qave
------- = -----------
%P P/ Pave
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Calculating the Price Elasticity Calculating the Price Elasticity of Demandof Demand
ave
ave
PP
QQP%Q%
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Calculating the Price Elasticity Calculating the Price Elasticity of Demandof Demand
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Calculating the Price Elasticity Calculating the Price Elasticity of Demandof Demand
Negative signPrice increase (a positive change in
price) leads to aQuantity decrease (a negative change in
quantity)The formula uses the absolute value of
these changes and does not attach the minus sign to the decrease in quantity
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ELASTICITYELASTICITY
Note that the price-elasticity of demand is UNIT-FREE!!!, which is very useful for comparisons!
Between countriesbetween goodsover time
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Next, more about Next, more about elasticitieselasticities