Microeconomics Chapter 4

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Chapter 4

2. Why do economists use percentages rather than absolute amounts in measuring the responsiveness of consumers to changes in price?

Why do economists use percentages rather than absolute amounts in measuring the responsiveness of consumers to changes in price? Economists use percentages rather than absolute amounts for two different reasons. The first reason for using percentages rather than absolute amounts has to do with the affect a particular amount can have on demand. The example in our book refers to using dollars or pennies, in one instance the dollar amount leads to a demand that is elastic, however that same dollar amount in pennies would lead one to see that demand is inelastic. The amount is the same, regardless of the currency, therefore the demand should be the same too. This is one reason why economists use percentages. The second reason deals with comparisons. Percentages help us more accurately compare the consumer response to a change, rather than using dollar amounts. The example in the book illustrates a $1 increase on a very expensive item and a very inexpensive item, although the absolute amount increased is the same, the percentages are at opposite ends of the spectrum 100% and .01% respectively.

3. How do you interpret the coefficient of the price elasticity of demand? Explain when Ed is 1.5, 0.7, and 1.0.

How do you interpret the coefficient of the price elasticity of demand? Explain when Ed is 1.5, 0.7, and 1.0. The coefficient Ed is used to measure elasticity or inelasticity of demand. The coefficient can be interpreted by performing an equation. You will divide the change in demand over the change in price to find Ed. The number you calculate determines the elasticity of demand. It is important to note that all calculations will result in negative numbers, thus one must use the absolute value of their findings to determine elasticity. If your calculation is greater than 1, then demand is elastic. So

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