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Principles of Microeconomics ElasticityELASTICITYElasticity Definition Elasticity measures the responsiveness of a change in a variable to the change in another variableeDQDPEconomists measure Elasticity as the ratio of percentages changes because a ratio of absolute change does not indicate the relative importance of a change eg a 1 increase in the price of a car would hardly affect car sales but a 1 increase in the price of gasoline would significantly affect the sale of gasolinePrice Elasticity of DemandDefinitionPrice Elasticity of Demand h is equal to the ratio of the percentage change in quantity demanded to the percentage change in price responsible for that percentage change in quantity demandedeDQDPDegIf a 20 increase in the price of gasoline causes a 10 decrease in the quantity demanded of gasoline then e102005Note Price Elasticity of Demand is usually defined for first year students as the absolute value of the ratio of the percentage changes of quantity demanded and price because the ratio is almost invariably negative unless Demand is upward sloping a rare and possibly nonexistent case and expression as an absolute value simplifies the relation between elasticity and changes in total revenueI will not use the absolute value expression of elasticity because the sign has significance particularly in relation to other types of elasticity 1 Principles of Microeconomics ElasticityDefineQ1InelasticDDP 1Die the percentage response of Quantity is less than the percentage change in Price2Unit elasticDQDP 1Die the percentage response of Quantity equals the percentage change in Price3ElasticDQDP 1Die the percentage response of Quantity is greater than the percentage change in PriceSince Demand data in reality is in the form of Prices and Quantities not percentage changes we need to express elasticity in prices and quantitiesElasticity of DemandDQDP 100DQQ100DPPDQQDPPDQDPPQ 1slopePQsince DQDP1DPDQ1slopeWe can express DQ and DP in terms of Po and P to get 1eQQoQPPoP11What are the P and the Q that we divide byPoint ElasticityPoint Elasticity calculates elasticity at a point ie relative to the original Price and QuantityeQQoQoPPoPo11 2
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