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01:220:102 (14)
Chapter 6


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Thomas Prusa

Chapter 6- Elasticity 6-1  Price elasticity of demand- ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign)  Midpoint method- technique for calculating the percent change o Calculate changes in a variable compared with the average, or midpoint, of the starting and final values 6-2  Demand is o Perfectly elastic when any price increase will cause the quantity demanded to drop to zero  Demand curve is a horizontal line o Elastic if the price elasticity of demand is greater than 1  Quantity effect dominates the price effect; fall in price increases total revenue o Inelastic if the price elasticity of demand is less than 1  Price effect dominates quantity effect, so a fall in price reduces total revenue o Unit-elastic if the price elasticity of demand is exactly 1  Two effects exactly balance, so a fall in price has no effect on total revenue  Total revenue- total value of sales of a good or service; equal to the price multiplied by the quantity sold  Factors that determine the price elasticity of demand o Whether close substitutes are available o Whether the good is a necessity (less elastic) or luxury (more elastic) o Share of income spent on the good o Time 6-3  Cross-price elasticity of demand between two goods measures the effect of the change in one’s good’s price on the quantity demanded of the other
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