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Economics
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  Pineda, Loretta Maria A. BSN-IV Economics I.   Elasticity     A measure a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.      Is a measure of how much buyers and sellers respond to changes in market conditions       Allows us to analyze supply and demand with greater precision.      Elasticity allows economists to quantify the differences among market without standardizing the units of measurement.   Types of Elasticity 1.   Price Elasticity of Demand o   Is the percentage change in quantity demanded given a change in the price.   o   It is a measure of how much the quantity demanded of a good responds to a change in the price of that good o   Determinants of Price Elasticity of Demand:     Availability of Close Substitutes    Necessities versus Luxuries    Definition of the Market     Time Horizon o   Demand tends to be more elastic :    the larger the number of close substitutes.    if the good is a luxury.    the more narrowly defined the market.    the longer the time period. o   Computing the price elasticity of demand     The price elasticity of demand is computed as the percentage change in price.    Price Elasticity of Demand = %Change in Quantity Demand %Change in the Price o   Example:    If the price of an ice cream cone increases from P2.00 to P2.20 and the amount you buy falls from 10 to 8 cones then the elasticity demand would be calculated as: 2102010000.2)00.220.2( 10010)810(   percent  percent   o   Computing the Price Elasticity of Demand Using the Midpoint Formula       The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change. o   Example:    If the price of an ice cream cone increases from $2.00 to $2.20 and the amount you buy falls from 10 to 8 cones the your elasticity of demand, using the midpoint formula, would be calculated as: o    Variety of Demand Curves    Inelastic Demand    Quantity demanded does not respond strongly to price changes.    Price elasticity of demand is less than one.       Elastic Demand    Quantity demanded responds strongly to changes in price.    Price elasticity of demand is greater than one.    )/2]P)/[(PP(P )/2]Q)/[(QQ(Q =Demandof ElasticityPrice 1212 1212  32.25.9222/)20.200.2( )00.220.2( 2/)810( )810(   percent  percent      Unit Elastic      Quantity demanded changes by the same percentage as the price.       Perfectly Inelastic    Quantity demanded does not respond to price changes.       Perfectly Elastic    Quantity demanded changes infinitely with any change in price.    o   Other Demand Elasticities      Income Elasticity of Demand       The income elasticity of demand   measures how the quantity demanded changes as consumer income changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.          Cross-Price Elasticity of Demand     The cross-price elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another good. It is calculated as the percentage change in quantity demanded of good 1 divided by the percentage change in the price of good 2.      2.   Elasticity of supply    measures how much the quantity supplied responds to changes in the price   o   Computing the price elasticity of supply     The price elasticity of demand is computed as the percentage change in price.    Price Elasticity of Supply = %Change in Quantity Supplied %Change in the Price o   Example:    Suppose that an increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produce from 9,000 to 11,000 gallons per month. Using the midpoint method, we calculate the percentage change in price as Percentage change in price = (3.15  –   2.85) / 3.00 × 100 = 10 percent    Similarly, we calculate the percentage change in quantity supplied as Percentage change in quantity supplied =(11,000  –  9,000)/10,000×100=20 %    In this case, the price elasticity of supply is
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