Wednesday, February 8, 2012

Price Elasticity Application

The New York Times has an article talking about how US gasoline consumers will respond to rising gas prices. As we know from the law of demand, that as prices go up, consumers tend to purchase less - this is not rocket science. Yet the article is not about the direction, but about the exact amount that consumers change. That is exactly what the price elasticity of demand is all about. It is a measure of how (in terms of percentage changes) consumers respond in their purchase of gasoline due to a (in terms of percentage change) a change in gasoline prices.

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