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**preview**shows page 1. to view the full**4 pages of the document.**Econ 1021 – Chap 4

Price Elasticity of Demand

Supply increase equilibrium price falls equilibrium quantity

increase

Large price change small quantity change

Small price change large quantity change

Price elasticity of demand units-free measure of responsiveness of

quantity demanded of a good to a change in price when all other inluences on

buying plans stay the same

Calculating Elasticity of Demand

Price elasticity of demand = percentage change in quantity demanded

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percentage change in price

Express change in price as percentage of average price

Change in quantity demanded as percentage of avg quantity

Orig price – $20.50 new price $19.50

Price change $1 --> average price is $20/pizza

Average Price and Quantity

Avg price/quantity most precise measurement of elasticity --> midpoint

b/w original and new

Price fall from 20.50 to 19.50 --> $1 change is 4.9 percent of 20.50

2 pizza change in quantity is 22.2% of 9 pizzas

Price elasticity of demand is 22.2/4.9 = 4.5

Percentage and Proportions

Elasticity --> ratio of 2 percentage changes

When divide one percent by another – 100s cancel

Percentage change is a proportionate change multiplied by 100

Proportionate change in price is delta p/p avg

Proportionate change in quan demanded is delta q/q avg

Divide answer if q/p --> same answer as percentage changes

Units-Free Measure

Elasticity --> units free measure --> percentage change in each variable is

dependent of units in wihich variable is measured

Ratio of 2 percentages --> # w/o units

Minus Sign and Elasticity

Price of good rise --> quantity demanded decrease

b/c pos change in price brings neg change in quan demanded

price elasticity of demand = neg number

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