ECON 1B03 Lecture Notes - Lecture 4: Ice Cream Cone, Demand Curve, Substitute Good

• School: McMaster University
• Department: Economics
• Course: ECON 1B03
• Professor: Hannah Holmes

Document Summary

Ti(cid:373)"s has just raised the pri(cid:272)e of (cid:272)offee agai(cid:374). I"(cid:373) (cid:373)ad (cid:271)ut i"(cid:373) still goi(cid:374)g to (cid:271)u(cid:455) o(cid:374)e e(cid:448)er(cid:455) morning. Elasticity: measures how responsive qd or qs is to changes in p and other determinants. This knowledge would be very useful to firms and policymakers whose decisions may affect price and therefore affect qd: a firm wants to maximize its profit. Other things being equal, it will want to maximize its total revenue. The fir(cid:373) (cid:449)ould like to sell as (cid:373)u(cid:272)h as it (cid:272)ould at the highest pri(cid:272)e it (cid:272)ould get. But, it (cid:449)ould(cid:374)"t want to charge a price so high that it loses customers and its revenue drops: here"s (cid:449)here k(cid:374)o(cid:449)i(cid:374)g the pri(cid:272)e elasti(cid:272)it(cid:455) of de(cid:373)a(cid:374)d for its good is ha(cid:374)d(cid:455) for a fir(cid:373). The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price: we"ll de(cid:374)ote pri(cid:272)e elasti(cid:272)it(cid:455) (cid:271)(cid:455) ep.