1 Law of Demand Law of Demand People do less of what they want to do as the cost of doing it rises Recall the Cost-Benefit Principle Pursue an action if and only i f its benefits are at least as great as its costs Recall the Reservation Price The highest price we’d be willing to pay
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ch04chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dEMAND cUREVE Elasticity
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7/23/2019 ch04chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dE…
Law of DemandPeople do less of what they want to do as
the cost of doing it risesRecall the Cost-Benefit PrinciplePursue an action if and only if its benefits
are at least as great as its costs
Recall the Reservation PriceThe highest price we’d be willing to pay
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on a product is e"ual to the dollar amountthat sellers receive
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Expenditure$%ill consumers spend more on my product
if & sell more units at a lower price or fewer
units at a higher price'(Depends upon price elasticity of demand
%hen price rises) total e!penditure mayincrease) decrease) or stay the same
This is due to the Law of Demand*s price rises) "uantity demanded falls
*s price falls) "uantity demanded rises
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7/23/2019 ch04chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dEMAND cUREVE Elasticity of Demand chapter 4 of dE…
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demanded that results from a one-percentchange in its price
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%hen calculating price elasticity of demand)you will always get a negative- %./'0or convenience we will ta+e the absolute value
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Expenditure0or an elastic product1uantity demanded is highly responsive
Percentage change in "uantity dominates
*n increase in price will reduce total e!penditure
* decrease in price will increase total e!penditure
0or an inelastic product1uantity demanded is not responsive
Percentage change in price dominates
*n increase in price will increase total e!penditure
* decrease in price will decrease total e!penditure
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will be higher in the long run than in the shortrun
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Fig. 5."'(raphical &nterpretation of $rice Elaticit%
of Demand
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demanded changes in response to a one-percent change in income
Positive for normal goods
3egative for inferior goods
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demanded of one good changes in responseto a one-percent change in the price of
another good
Positive for substitutes
3egative for complements
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price elasticity 5more elastic60le!ibility of &nputs
7obility of &nputs
*bility to Produce 2ubstitute &nputsTime
ni"ue and ssential &nputs
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%hen additional units can be producedusing the same combination of inputspurchased at the same prices
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%hat determines whether the supply ofa particular good will be elastic orinelastic'*vailability of resources used to produce
the good , how "uic+ly and easily canproducers respond to a price change'
g of good with inelastic supply'
g of good with elastic supply'
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