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Social Science
Economics
Agricultural Economics
Chapter 5`
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for econ 200
Terms in this set (12)
Price of Elasticity of Demand
a measure of how
much the quantity demanded of a good responds to
a change in the price of that good, computed as the
percentage change in quantity demanded divided
by the percentage change in price.
Example of price elasticity of demand
If price goes up by 6% and the quantity demanded goes down by 3%, the price elasticity of demand is 0.5
How to calculate prie elasticity of demand
Numerator- the percentage change in quantity
Denominator- the percentage change in price
Expenditure
Price x Quantity
Cross Price Elasticity of demand
is a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.
The Cross price elasticity of demand between Substitutes
is Positive
Example of Cross price elasticity of demand between Substitutes
Suppose the price of tea rises
Percentage change in the price of tea is positive
Demand for coffee rises
Percentage change in the demand for coffee is positive
Therefore the cross price elasticity is positive
The cross price elasticity of demand between Complements
is negative
Example of The cross price elasticity of demand between Complements
Suppose the price of DVD players rises
-Percentage change in the price of DVD players is positive
-Demand for DVD's falls
-Percentage change in the demand for -DVD's is negative
-Therefore the cross price elasticity is negative
Income Elasticity of Demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income.
If a good is a NORMAL good
then the income elasticity of demand is POSITIVE
If a good is an INFERIOR good
then the income elasticity is NEGATIVE
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