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What effect does a change in price have on the quantity demanded?

What effect does a change in price have on the quantity demanded?. Elasticity of demand is the response to price change for different goods. How do different goods respond to being dropped?. An anology. DROP A SOCCER BALL ?. GOOD RESPONSE. ELASTIC. BUT, DROP A FORK LIFT ?.

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What effect does a change in price have on the quantity demanded?

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  1. What effect does a change in price have on the quantity demanded?

  2. Elasticity of demand is the response to price change for different goods

  3. How do different goods respond to being dropped? An anology

  4. DROP A SOCCER BALL ? GOOD RESPONSE ELASTIC

  5. BUT, DROP A FORK LIFT ? NOT MUCH RESPONSE INELASTIC

  6. If the response of quantity demanded to a price change is proportional It’s called unit elastic

  7. Suppose gas cost $3.00 a gallon • But now it’s $3.50 (3/3.5=.857) • .5/{6.5/2} = .5/3.25 = .15 or 15% • If you had previously bought 40 gallons a week, about how many would you purchase if gas is unit elastic? • .857 X 30 = 25.71 • 30 – 25.71 = 4.29 • 4.29/{55.71/2} = 4.29/27.85 =.15

  8. Qualities that affectElasticity of Demand • Substitutability • Proportion of income spent on product • Luxury or necessity? • Habit-forming? • Time

  9. Elasticity coefficients εd = percentage change in quantity demanded percentage change in price Hot tip !!! To solve for Percentage Change: The new less the old by “the old plus the new, divided by two”

  10. MIDPOINT OR Arc METHOD ∆ Q εd = (Q+Q1)/2 ∆P (P+P1)/2

  11. example Price X quantity = total revenue $10 X 10 = $100 $ 9 X 12 = $108 2 2 εd = (10+12)/2 = 11 = .18 = 1.8 elastic 1 1 = .10 (10+9)/2 = 9.5 {2 X 9.5} = 20 = 1.8 {11 x 1} = 11

  12. Quick quiz:What the coefficients mean Elastic εd > 1 εd < 1 εd = 1 Inelastic Unit Elastic

  13. Summarizing Price Elasticity of Demand

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