#cfa #cfa-level-1 #economics #microeconomics #reading-13-demand-and-supply-analysis-introduction #study-session-4
economists prefer to use a gauge of sensitivity that does not depend on units of measure. That metric is called
elasticity , and it is defined as the ratio of
percentage changes. It is a general measure of how sensitive one variable is to any other variable. For example, if some variable
y depends on some other variable
x in the following function:
y =
f(
x), then the elasticity of
y with respect to
x is defined to be the percentage change in
y divided by the percentage change in
x, or %∆
y/%∆
x. In the case of
own-price elasticity of demand , that measure is
10
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4.1. Own-Price Elasticity of Demandent on price as our measure of sensitivity, we would always need to recall the units in which Q and Pwere measured when we wanted to describe the sensitivity of gasoline demand. That could be cumbersome.
Because of this drawback, <span>economists prefer to use a gauge of sensitivity that does not depend on units of measure. That metric is called elasticity , and it is defined as the ratio of percentage changes. It is a general measure of how sensitive one variable is to any other variable. For example, if some variable y depends on some other variable x in the following function: y = f(x), then the elasticity of y with respect to x is defined to be the percentage change in y divided by the percentage change in x, or %∆y/%∆x. In the case of own-price elasticity of demand , that measure is10
Equation (23)
Edpx=%ΔQdx%ΔPx
Notice that this measure is independent of the units in which quantity and price are measured. If, for example, when Summary
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