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chapter SIX

elasticity, consumer and Producer Surplus

I.Price Elasticity of Demand

A.Law of demand tells us that consumers will respond to a price decrease by buying more of a product (other things remaining constant), but it does not tell us how much more.

B.The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand.

1.If consumers are relatively responsive to price changes, demand is said to be elastic.

2.If consumers are relatively unresponsive to price changes, demand is said to be inelastic.

3.The terms elastic or inelastic describe the degree of responsiveness.  A precise definition of what we mean by “responsive” or “unresponsive” follows.

4.CONSIDER THIS … A Bit of a Stretch

The Ace bandage stretches a lot when force is applied (elastic); the rubber tie-down (not to be confused with a rubber band) moves stretches little when force is applied (inelastic).

C.Price elasticity coefficient and formula:

     E d   =        Percentage Change in Quantity   

                                     Percentage Change in Price

1.Using averages – the midpoint formula

a.Using traditional calculations, the measured elasticity over a given range of prices is sensitive to whether one starts at the higher price and goes down, or the lower price and goes up.  The midpoint formula calculates the average elasticity over a range of prices to alleviate that problem.

b.The midpoint formula for elasticity is:

Ed = [(change in Q)/(sum of Q’s/2)] divided by [(change in P)/(sum of P’s/2)]

2.Emphasis: The percentages changes are compared,  not the absolute changes.

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