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Chapter 7 Elasticity of Demand and Supply

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Demand Elasticity (Price Elasticity of Demand) E d = (%∆Q d )/(%∆P) = {(Q d2 - Q d1 )/[(Q d1 + Q d2 )/2]}/ {(P 2 – P 1 )/[(P 1 + P 2 )/2]} E d represented as positive by convention, though actually always negative due to downward-sloping demand curve hence always take absolute value

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Chapter 20 Figure 20.1(a)

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Chapter 20 Figure 20.1(b)

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Chapter 20 Table 20.1

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Chapter 20 Figure 20.2(a)

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Determinants of Price Elasticity of Demand Demand tends to be more elastic or less inelastic: if the good is a luxury; the longer the time period; the greater the number of close substitutes; and the more narrowly defined the market.

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Determinants of Price Elasticity of Demand Demand tends to be more inelastic or less elastic: if the good is a necessity; the shorter the adjustment time; if there are few good substitutes; and the more broadly defined the market.

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Chapter 20 Figure 20.2(b) Total Revenue and Elasticity

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Chapter 20 Table 20.2

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Computing Demand Elasticity Demand for Ice Cream EDED ($ $2.00) / $2.10 (8 - 10) / 9 =

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Computing Demand Elasticity Demand for Ice Cream EDED (9.5%) (22%) =

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Computing Demand Elasticity Demand for Ice Cream EDED = 2.32

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Computing Demand Elasticity Demand for Ice Cream EDED = 2.32 Demand is Elastic

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Chapter 20 Table 20.3

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Supply Elasticity (Price Elasticity of Supply) E s = (%∆Q s )/(%∆P) = {(Q s2 - Q s1 )/[(Q s1 + Q s2 )/2]}/ {(P 2 – P 1 )/[(P 1 + P 2 )/2]} E s always positive due to upward-sloping demand curve hence never take absolute value

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Chapter 20 Figure 20.3(a)

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Chapter 20 Figure 20.3(b)

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Chapter 20 Figure 20.3(c)

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Cross Elasticities (Cross-Price Elasticity of Demand) E xy = (%∆Q dx )/(%∆P y ) = {(Q dx2 - Q dx1 )/[(Q dx1 + Q dx2 )/2]}/ {(P y2 – P y1 )/[(P y1 + P y2 )/2]} E xy measures responsiveness of the demand for x to changes in the price of y Positive for substitutes Negative for complements never take absolute value

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Income Elasticities (Income Elasticity of Demand) E i = (%∆Q d )/(%∆Y) = {(Q d2 - Q d1 )/[(Q d1 + Q d2 )/2]}/ {(Y 2 – Y 1 )/[(Y 1 + Y 2 )/2]} E i measures responsiveness of demand for x to changes in (average) consumer income Positive for normal goods Negative for inferior goods never take absolute value

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Chapter 20 Table 20.4

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