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D1
220
180
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Q
120
140
200
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Elasticity
A general definition:
Elasticity is a (standard) measure of the
degree of sensitivity ( or responsiveness) of one
variable to changes in another variable.
The price elasticity of Demand
The (self) price elasticity of demand is a
measure of the degree of sensitivity of demand
to changes in the (self) price, ceteris paribus.
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Ep =
Percentage Change in Price
Change in Quantity
Quantity
Ep =
Change in Price
Price
video.edhole.com
P
a
10
4
2
d
8
18
80
90
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a
b
c
4
Ep = (-10/90)/(2/2) = -.11
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18
80 90
D
Q
Arc Elasticity
To get the average elasticity between two
points on a demand curve we take the
average of the two end points (for both
price and quantity) and use it as the initial
value:
Q2-Q1
10
(Q1+Q2)
8+18
Ea =
P2-P1
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(P1+P2)
= -3.49
-2
10+8
10
8
Elastic
| Ep | < 1 :
Inelastic
| Ep | = 1 :
Unit-elastic
a E =-3.49
b
c E = -.17
d
4
2
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| Ep | > 1 :
18
80 90
Point Elasticity
Q
--------Q1+Q2
Q
P1+P2
Q
P
E = ------------ = ------- . ------- = ------- . -----P
P Q1+Q2
P
Q
--------P1+P2
dQ
P
Or,
= ------ . ----Q
video.edhole.com dP
P,MR
Q = C - b P
|E|=1
C
1
P = ----- - ----- Q
b
b
D
MR
Q
0
TR
C
2
MR = ------ - ------ Q
b
b
Note:
In the demand equation
dQ/dP = -b
That means
0
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P
E p = -b ----Q
dQ P
P
E = ----- . ----- = -b . -----dp
Q
Q
Q = C - b P
dQ
---- = - b
dp
P, MR
1
MR = P. ( 1 + ---- )
E
Slope= -1/b
Slope=-2/b
MR
0
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D
Q
C
Special Cases
P
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Important Observations
When demand is elastic, a decrease in price
will result is an increase in the revenue
(sales).
When demand is inelastic, a decrease in
price will result is a decrease in the revenue
(sales).
When demand is unit-elastic, an increase
(or a decrease) in price will not change the
revenue (sales).
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Eating at restaurants
Groceries
Availability of substitutes
Chicken versus beef
How much of our income a good takes
Salt versus Nike sneakers
The passage of time
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D2
Do
D1
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Q3
Q2
Q1 Qo Qo
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EI =
I2-I1
I1+I2
d Q
I
= or = ------ . -----d I
Q
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Ec =
or =
Py2- Py1
Py1+Py2
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d Qx
Py
----------- . ------d Py
Qx