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To get a better idea of price elasticity, it might be helpful to use our hypothetical market demand function: Qdx=11,200−400Px . For linear demand functions, the first term in the last line of Equation 24 is simply the slope coefficient on Px in the demand function, or −400. (Technically, this term is the first derivative of Qdx with respect to Px, dQdx/dPx , which is the slope coefficient for a linear demand function.) So, the elasticity of demand in this case is –400 multiplied by the ratio of price to quantity. Clearly in this case, we need to choose a price at which to calculate the elasticity coefficient. Let’s choose the original equilibrium price of $3. Now, we need to find the quantity associated with that particular price by inserting 3 into the demand function and finding Q = 10,000. The result of our calculation is that at a price of 3, the elasticity of our market demand function is −400 (3/10,000) = −0.12. How do we interpret that value? It means, simply, that when price equals 3, a 1 percent rise in price would result in a fall in quantity demanded of only 0.12 percent. (You should try calculating price elasticity when price is equal to, say, $4. Do you find that elasticity equals –0.167?)
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4.1. Own-Price Elasticity of Demand
riable x is simply the change in x (denoted “∆x”) divided by the level of x. So, we can rewrite Equation 23, using a couple of simple steps, as Equation (24)  Edpx=%ΔQdx%ΔPx=ΔQdxQdxΔPxPx=(ΔQdxΔPx)(PxQdx) <span>To get a better idea of price elasticity, it might be helpful to use our hypothetical market demand function: Qdx=11,200−400Px . For linear demand functions, the first term in the last line of Equation 24 is simply the slope coefficient on P x in the demand function, or −400. (Technically, this term is the first derivative of Qdx with respect to P x , dQdx/dPx , which is the slope coefficient for a linear demand function.) So, the elasticity of demand in this case is –400 multiplied by the ratio of price to quantity. Clearly in this case, we need to choose a price at which to calculate the elasticity coefficient. Let’s choose the original equilibrium price of $3. Now, we need to find the quantity associated with that particular price by inserting 3 into the demand function and finding Q = 10,000. The result of our calculation is that at a price of 3, the elasticity of our market demand function is −400 (3/10,000) = −0.12. How do we interpret that value? It means, simply, that when price equals 3, a 1 percent rise in price would result in a fall in quantity demanded of only 0.12 percent. (You should try calculating price elasticity when price is equal to, say, $4. Do you find that elasticity equals –0.167?) In our particular example, when price is $3 per gallon, demand is not very sensitive to changes in price, because a 1 percent rise in price would reduce quantity demanded b


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