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Chapter 4

Microeconomics II Chapter 4

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Microeconomics 200 - Wednesday, July 24th notes Chapter 5 - Elasticity Elasticity - responsiveness to a change in price Elasticity of demand - The percentage change in quantity demanded resulting from a percentage change in price As seen above: there’s a movement along the curve when price changes. However, graph #1 is more elastic because it has a steeper slope (greater slope) y2-y1/x2-x1 .. 6/10 > 0.25/240 … meaning, graph 1 represents a greater responsiveness of buyers to change in price. Midpoint Formula - to calculate percentages - calculating elasticities % change in QD / % change in Price which equals to.... Q1 - Q0 / (Q1+Q0 / 2) / P1 - P0/ (P1+P0 / 2) Elasticity = always a negative number -> take the absolute value of it Perfect Inelasticity of Demand = 0 No change in quantity no matter how much price changes * economists argue that this never happens for any good Inelastic Demand - people buy close to the same amount regardless of price change. * therefore, buyers react little (drugs, medicine, etc.) * Ed = 0 : perfectly inelastic demand * Ed < 1 : inelastic demand * Ed > 1 : elastic demand * Ed = infinity : perfectly elastic demand Elastic Demand An increase in price yields a greater decrease in quantity; buyers react more. Perfectly Elastic Demand Consumers will buy any quantity at $9, but none at a higher price. Infinite amount of quantities purchased at $9. Unit Elasticity = 1 (revenues never change) % change P = % change Q percentage change in quantity demanded = % change in price Elasticity is always changing in a straight line, not constant, becomes more inelastic as it goes down. Revenue: Price x Quantity -> always true or R=PQ We
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