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Principles of Microeconomics Textbook

Principles of Microeconomics Textbook

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Published by Alex Lee Ming Jie

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Published by: Alex Lee Ming Jie on Apr 02, 2012
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10/06/2015

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When the price of a good or service rises, the quantity demanded falls. But to pre-
dict the effect of the price increase on total expenditure, we also must know by how
much quantity falls. The quantity demanded of some goods such as salt is not very
sensitive to changes in price. Indeed, even if the price of salt were to double, or to
fall by half, most people would hardly alter their consumption of it. For other
goods, however, the quantity demanded is extremely responsive to changes in price.
For example, when a luxury tax was imposed on yachts in the early 1990s, pur-
chases of yachts plummeted sharply.

PRICE ELASTICITY DEFINED

The price elasticity of demandfor a good is a measure of the responsiveness of the
quantity demanded of that good to changes in its price. Formally, the price elastic-

S

S'

D

50

40

0

Q (1,000s of ounces/day)

P ($/ounce)

50

80

FIGURE 4.1
The Effect of Extra
Border Patrols on the
Market for Illicit Drugs.

Extra patrols shift supply
leftward and reduce the
quantity demanded,but they
may actually increase the
total amount spent on drugs.

Could reducing the supply of
illegal drugs cause an increase
in drug-related burglaries?

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