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ELASTICITIES

ELASTICITIES. Chapter 4 . Elasticities. The study of Elasticities examines the responsiveness of consumers or producers to a change in a variable in the marketplace.

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ELASTICITIES

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  1. ELASTICITIES Chapter 4

  2. Elasticities • The study of Elasticities examines the responsiveness of consumers or producers to a change in a variable in the marketplace. • Studying this has implications for businesses – so they can be aware of the effects of changes – and implications for governments – so they can decide which good to place taxes on, for example.

  3. Elasticity of Demand • Elasticity of Demand is a measure of how much the demand for a product changes when there is a change in one of the factors that determines demand. • There are 3 elasticities of demand to consider: • Price elasticity of demand (PED) • Cross elasticity of demand (XED) • Income elasticity of demand (YED)

  4. Price Elasticity of Demand (PED) – Elastic or Inelastic? • If a small increase in price leads to a proportionally large decrease in quantity demanded, consumers are said to be very price sensitiveand demand therefore is price elastic. • If a large increase in price has little effect on the quantity of a good demanded, consumers are not very price sensitive, and demand is said to be price inelastic.

  5. Price Elasticity of Demand (PED): PED coefficient PED= Percentage change in quantity demanded Percentage change in price PED = %ΔQd %ΔP PED=(Qd2-Qd1)÷ Qd1 (P2-P1) ÷ P1

  6. PED coefficient • The PED coefficient is negative because of the inverse relationship between price and quantity. • Since the law of demand applies to nearly all goods and services, we typically ignore the the negative and express PED as an absolute value.

  7. Exercises page 75 1-3 • PED 40/50 =.8 • First, calculate the change in price. Plug this into PED formula. Simplify(1.5x25)=37.5. % change in quantity resulting from a 25% increase in price is 37.5%. Therefore, new quantity is 200- (.375x200). An increase in price from $8 to $10 leads to a decrease in the quantity demanded from 200 to 125 units. • PED usually expressed as an absolute value and the PED coefficient is therefore positive. (law of demand – inverse relationship)

  8. Cross Elasticity of Demand

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