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Economics For Managers: Market Equilibrium Price Elasticity of Demand, Income and Cross Price Elasticities of Demand
Economics For Managers: Market Equilibrium Price Elasticity of Demand, Income and Cross Price Elasticities of Demand
Market Equilibrium
Price Elasticity of
Demand, Income and
cross price elasticities
of Demand
Re-cap of Session 1
Equilibrium Analysis
We go deeper!
Equilibrium
Slopes?
Comments?
12
Price /kg
Price /kg
12 12
Price /kg
10 10 10
12
Price /kg
Price /kg
12 12
Price /kg
10 10 10
12
Price /kg
Price /kg
12 12
Price /kg
10 10 10
ΔQ/ΔP
Interpretation of slope/sensitivity
ΔQ/ΔP
BUT THERE SEEMS TO BE A PROBLEM OF
COMPARISON, BECAUSE OF DIFFERENCE IN UNITS OF
MEASUREMENT!!
Elasticity of Demand
P Q
10 200 (∆Q/Q)/ (∆P/P)
or
12 192
(∆Q/ ∆P) * (P/Q)
COMPUTE!
Price elasticity of demand:
Computation
P Q
10 200
12 192
∆Q/Q = ??
∆P/P = ??
P Q
10 200
12 192
Notice something
about the slopes?
Elasticities
Point Elasticity
As the changes in Q and P become smaller
and smaller, the arc comes closer to be a
point; therefore we can define ‘point
elasticity’ - at a particular Q and at a
particular P-
Page 61
Demand Function for Wheat: Q = 3550-
266P
Current P = $3.46 Find Price Elasticity
Numerical, from book
Page 61
Demand Function for Wheat: Q = 3550-
266P
Current P = $3.46 Find Price Elasticity
Q = 2630
(P/Q)*(dQ/dP) = (3.46/2630)*-266 = -.35
Interpret!
Learning Objective