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## Elasticity: A Measure of Response

by: Kerrigan Unter

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# Elasticity: A Measure of Response ECON 1011

Marketplace > George Washington University > Economcs > ECON 1011 > Elasticity A Measure of Response
Kerrigan Unter
GWU
GPA 3.0
INTRODUCTION TO MICROECONOMICS
Foster, I

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COURSE
INTRODUCTION TO MICROECONOMICS
PROF.
Foster, I
TYPE
Class Notes
PAGES
3
WORDS
KARMA
25 ?

## Popular in Economcs

This 3 page Class Notes was uploaded by Kerrigan Unter on Monday October 19, 2015. The Class Notes belongs to ECON 1011 at George Washington University taught by Foster, I in Summer 2015. Since its upload, it has received 23 views. For similar materials see INTRODUCTION TO MICROECONOMICS in Economcs at George Washington University.

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Date Created: 10/19/15
ECON 1011 Chapter 8 Elasticity A Measure of Response The Price Elasticity of Demand Price elasticity of demand the percentage change in quantity demanded of a particular good or service divided by the percentage change in the price of that good or service all other things unchanged eD change in quantity demanded change in price Because the price elasticity of demand shows the responsiveness of quantity demanded to a price change assuming that other factors that in uence demand are unchanged it re ects movements along a demand curve With a downwardsloping demand curve price and quantity demanded move in opposite directions so the price elasticity of demand is always negative A positive percentage change in price implies a negative percentage change in quantity demanded and vice versa Arc elasticity measure of elasticity based on percentage changes relative to the average value of each variable between two points The are elasticity method has the advantage that it yields the same elasticity whether we go from point A to point B or from point B to point A Total revenue a rm s output multiplied by the price at which it sells that output An increase in price reduces the quantity demanded and a reduction in price increases the quantity demanded Price elastic situation in which the absolute value of the price elasticity of demand is greater than 1 Unit price elastic situation in which the absolute value of the price elasticity of demand is equal to 1 Price inelastic situation in which the absolute value of the price of elasticity of demand is less than 1 If price and quantity demanded change by the same percentage then total revenue does not change When demand is price inelastic a given percentage change in price results in a smaller percentage change in quantity demanded That implies that total revenue will move in the direction of the price change a reduction in price will reduce total revenue and an increase in price will increase it When price rises total revenue rises When demand is price inelastic a given percentage change in price results in a smaller percentage change in quantity demanded That implies that total revenue will move in the direction of the price change an increase in price will increase total revenue and a reduction in price will reduce it A demand curve can also be used to show changes in total revenue For any linear demand curve demand will be price elastic in the upper half of the curve and price inelastic in its lower half At the midpoint of a linear demand curve demand is unit price elastic Perfectly inelastic situation in which the price elasticity of demand is zero Perfectly elastic situation in which the price elasticity of demand is infinite The greater the absolute value of the price elasticity of demand the greater the responsiveness of quantity demanded to a price change The price elasticity of demand for a good or service will be greater in absolute value if many close substitutes are available for it If a good has no close substitutes its demand is likely to be somewhat less price elastic One reason price changes affect quantity demanded is that they change how much a consumer can buy a change in the price of a good or service affects the purchasing power of a consumer s income and thus affects the amount of a good the consumer will buy Raise Fares Lower fares What s a public transit manager to do Elasticity the ratio of the percentage change in a dependent variable to a percentage change in an independent variable ey X change in y change in X A variable such as y is said to be more elastic if the percentage change in y is large relative to the percentage change in X It is less elastic if the reverse is true Responsiveness of demand to other factors 2 Income Elasticity of Demand Income elasticity of demand the percentage change in quantity demanded at a speci c price divided by the percentage change in income that produced the demand change all other things unchanged eY change in quantity demanded change in income The symbol Y is often used in economics to represent income A positive income elasticity of demand means that income and demand move in the same direction an increase in income increases demand and a reduction in income reduces demand most goods and services are normal and thus their income elasticities are positive If a good or service is inferior then an increase in income reduces demand for the good implies a negative income elasticity of demand 22 Cross Price Elasticity of Demand Cross price elasticity of demand equals the percentage change in the quantity demanded of one good or service at a speci c price divided by the percentage change in the price of a related good or service 6A B change in quantity demanded of good A change in price of good B Cross price elasticities of demand de ne whether two goods are substitutes complements or unrelated If two goods are substitutes an increase in the price of one will lead to an increase in the demand for the other the cross price elasticity of demand is positive If two goods are complements an increase in the price of one will lead to a reduction in the demand for the other the cross price elasticity of demand is negative If two goods are unrelated a change in the price of one will not affect the demand for the other the cross price elasticity of demand is zero

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