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October 6th Notes - Elasticity: Motivation

by: Vivek Kotikalapudi

October 6th Notes - Elasticity: Motivation Econ 2302

Marketplace > University of Texas at Dallas > Economics > Econ 2302 > October 6th Notes Elasticity Motivation
Vivek Kotikalapudi

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These are the notes for October 6th's class which covers the introductory material for Elasticity. This is also the first out of the three packets of notes of Elasticity to be covered on our quiz o...
Daniel Arce
Class Notes
elasticity, Priceelasticityofdemand
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This 3 page Class Notes was uploaded by Vivek Kotikalapudi on Wednesday October 12, 2016. The Class Notes belongs to Econ 2302 at University of Texas at Dallas taught by Daniel Arce in Fall 2016. Since its upload, it has received 63 views. For similar materials see Microeconomics in Economics at University of Texas at Dallas.


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Date Created: 10/12/16
Microeconomics Notes– October 6 th Instructor: Daniel Arce Elasticity Elasticity – Motivation: Change∈Quantity Slope of a demand curve: | Change∈Price |  In order to measure price sensitivity, take the absolute value of the change in quantity over the change in price. This equation can also be ∆Q written as | | ∆ P Example: Price (In Quantity Quantity $) Demand Demand ed (tons) ed (pounds) $10 18 36,000 $20 16 32,000 $30 14 28,000 1. Calculate measure of sensitivity to a price change from $10 to $20 for both tons and pounds. For tons: ∆Q 16−18 2 | | -> | | = = .2 ∆P 20−10 10 ∆Q 32,000−36,000 4000 For pounds: | ∆P | -> | 20−10 | = 10 = 400 Therefore,  For every 1 unit change in Price, there is a .2 unit change in Quantity in Tons.  For every 1 unit change in Price, there is a 400 unit change in Quantity in Pounds. *Slope is a poor measure of demand sensitivity as it depends on the units of measurements of Price and Quantity. Solved by ELASTICITY: - Elasticity is a scale-neutral measure of the responsiveness of one (dependent) variable to changes in another (independent) variable (holding all other relevant variables constant). - Always measures responsiveness in terms of percentage changes. - Ratio of the percentage change of the dependent variable over the percentage change of the independent variable. Elasticity: change(∆)dependent variable change( )independent variable  Numerator of percentage change – per unit change in the variable being measured. - The difference between the new value of the variable and the old value of the variable.  Denominator of percentage change – actual variable we are looking for. - Average of the new and old value of the variable. New−Old Average = 2  Director of change does not matter.  Why we use the average = The measurement of percentage change should be the same regardless in whether or not the price increases or decreases, therefore, we use the average value in the denominator of our calculation. In order to find the percentage change, we divide the change in variable by the average of the variable. % change in Price = ∆P Avg P % change in Quantity = ∆Q AvgQ Price Elasticity of Demand: change∈thedependentvariable | change∈theindependentvariable |  We use absolute value for the Elasticity of Demand so that greater values indicate a greater level of sensitivity.  With absolute value, we can always follow the rule, as Ed, Sensitivity Characterizing Goods According to Elasticity  0 < E d < 1: Q dis not very responsive to price changes and we say that demand is inelastic. For example, if Ed= .25, then a 1% change in price induces only a .25% (lesser) % change in Q d.  Ed > 1: Q d is very responsive to price changes; demand is elastic. For example, if Ed = 1.5, then a 1% price change induces a 1.5% (greater) % change in Q d.  Ed = 1: Demand is unitary elastic.  Ed = 0: Demand is perfectly inelastic.  Ed = : Demand is perfectly elastic. - undifferentiated products (agricultural products, commodities)


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