Economics 1021A/B Chapter 4: Elasticity
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ECON 1021A/B Full Course Notes
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Calculating price elasticity: price elasticity of demand = % change in price: use the average change in quantity demanded and the average change in price. Calculates the price elasticity at the midpoint between the original point and the new point: use percentages to apply a proportionate change, price of a good rises, quantity demanded decreases. Positive price change means negative change in quantity, therefore price elasticity is a inherently negative number. It is the magnitude of elasticity that informs about responsiveness, so the negative sign can be ignored. Elastic vs. inelastic demand: perfectly inelastic demand quantity remains the same, even if price changes, unit elastic demand change in proportion of quantity demanded equals the proportionate change in price. Inelastic demand the change in proportion of quantity demanded is less than the proportionate change in price. Proportion of income spent on good: cteris parabus the greater the proportion spent on a good, the more elastic the demand for it.