THE MIDPOINT METHOD: A BETTER WAY TO CALCULATE PERCENTAGE CHANGES AND ELASTICITIES

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THE MIDPOINT METHOD: A BETTER WAY TO CALCULATE PERCENTAGE CHANGES AND ELASTICITIES If you try calculating the price elasticity of demand between two points on a demand curve, you will quickly notice an annoying problem. The elasticity from point A to point B seems different from the elasticity from point B to point A. For example, consider […]

COMPUTING THE PRICE ELASTICITY OF DEMAND

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COMPUTING THE PRICE ELASTICITY OF DEMAND Now that we have discussed the price elasticity of demand in general terms, let’s be more precise about how it is measured. Economists compute the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in the price. That is, Price elasticity of demand […]

Time Horizon

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Time Horizon Goods tend to have more elastic demand over longer time horizons. When the price of gasoline rises, the quantity of gasoline demanded falls only slightly in the first few months. Over time, however  people buy more fuel efficient cars, switch to public transportation, and move closer to where they work. Within several years, the quantity of […]

Definition of the Market

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Definition of the Market The elasticity of demand in any market depends on how we draw the boundaries of the market. Narrowly defined markets tend to have more elastic demand than broadly defmed markets because it is easier to find close substitutes for narrowly defined goods. For example, food, a broad category, has a fairly inelastic demand because […]

Necessities versus Luxuries

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Necessities versus Luxuries Necessities tend to have inelastic demands, whereas luxuries have elastic ,demands. When the price of a visit to the doctor rises, people will not dramatically alter the number of times they go to the doctor, although they might go somewhat less often. By contrast, when the price of sailboats rises, the quantity of sailboats […]

Availability of Close Substitutes

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Availability of Close Substitutes Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. For example, butter and margarine are easily substitutable. A small increase in the price of butter, assuming the price of margarine is held fixed, causes the quantity of butter sold to […]

THE PRICE ELASTICITY OF DEMAND AND ITS DETERMINANTS

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THE PRICE ELASTICITY OF DEMAND AND ITS DETERMINANTS The law of demand states that a fall in the price of a good raises the quantity demanded. The price elasticity of demand measures how much the quantity demanded responds to a change in price. Demand for a good is said to be elastic if the quantity demanded responds […]

Elasticity and Its Application

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Elasticity and Its Application magme yourself as a Kansas wheat fanner. Because you earn all your income from selling wheat, you devote lrnuch effort to making your land as productive as it can be. You monitor weather and soil conditions, check your fields for pests and disease, and study the latest advances in farm technology.You know that the […]