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ECON 160 Midterm: Spr17Econ160Midterm2Review

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ECON 160

Price Elasticity of Demand: (unit free) measure of responsiveness of QD of good to change in its price when all other influences on buyers plans remain the same. An increase in supply = small decrease in price, large increase in QD An increase in supply = large decrease in price, small increase in QD o Units free: ratio of 2 percent changes and cancels out Changing units of measurement of price or Q leave elasticity value the same ALWAYS NEGATIVE: P and QD move in opposite directions (Law of Demand) (Drop negative): ABSOLUTE VALUE (magnitude): measure of responsiveness ED DOES NOT EQUAL demand curve compare percentage change in QD with percentage change in price = 100 + = 2 = ) elastic Ed >1 , P increases, Revenue decreases inelastic 0< Ed <1 , price increases, revenue increases o Risefall in price: = ( )100 Midpoint Method: o elasticity compares percentage change in QD with percentage change in price o measure of percentage change that does not depend on direction of price change divide change in price by AVG price (AVG price of new price and initial price) x100 Avg price is the midpoint bw initial and new price = 100 = 100 + 2 o Average price is same regardless of whether price risesfalls Price change in price calculated by midpoint method is same (magnitude) for price risefall
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