# Micro Economics.- Elasticity

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1. What is the main difference between the law of demand and the price elasticity of demand? The law of demand tells you that quantity demanded will increase as price falls, or conversely, that quantity demanded will decrease as price rises. So, the law of demand says there is an inverse relationship between price and quantity demanded. By contrast, the price elasticity of demand tells you “how much” quantity demanded changes when price changes. It shows the responsiveness of a change in quantity demanded to a change in price. [text: E p. 114; MI p. 114] 2. Why do economists use percentages rather than absolute amounts in measuring the responsiveness of consumers to changes in price? There are two basic reasons. First, the choice of units when absolute changes are used will have an arbitrary effect on the interpretation of responsiveness. For example, if price is calculated in dollars, then a one-unit drop in price (from \$5 to \$4) might be associated with a 10-unit increase in quantity. If, however, the price was calculated in cents, then a 100-unit drop in price would be associated with a 10-unit increase in quantity. In the first case, it would appear the demand is inelastic and in the second case it would appear to be elastic. Second, the use of percentages allows comparisons to be made across products. You can compare the percentage change in quantity demanded to a percentage change in price across all products for which you have data on changes in price and quantity demanded. [text: E pp. 114-115; MI pp. 114-115] 3. How do you interpret the coefficient of the price elasticity of demand? Explain when Ed is 1.5, 0.7, and 1.0. The interpretation is based on the elasticity formula. The formula has the percentage change in quantity demanded in the numerator and the percentage change in price in the denominator. A coefficient of 1.5 indicates that