ECON 1B03 Lecture Notes - Lecture 4: Demand Curve

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erincat447

21 May 2018

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Unit 4.1

Price Elasticity of Demand

Elasticity

- Elasticity: measures how responsive Qd or Qs is to changes in Price and other determinants

- If say, Price changes, will Qd change by a little or by a lot?

- This knowledge would be very useful to firms and policy makers whose decisions may affect

price and therefore affect Qd

- A firm wants to maximize profit. Other things being equal, it will want to maximize its total

revenue

- Here’s where knowing the prie elasticity of demand for its good is handy for a firm

- It can tell whether it should raise or lower its price (assuming it has the ability to set price)

Total Revenue

- Total Revenue, TR is defined as Price x the Quantity Traded: TR=(P)(Q)

Price Elasticity of Demand

- Price Elasticity of Demand: is a measure of how much the quantity demanded of a good

responds to a change in the price of that good

- Will a small price change result in a proportionately bigger or smaller change in quantity

demanded

- The price elasticity of demand is computed as the percentage change in the quantity demanded

divided by the percentage change in price.

- We’ll denote prie elastiity y Ep

- The number we get from our calculations is called the coefficient of elasticity

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Elasticity: measures how responsive qd or qs is to changes in price and other determinants. This knowledge would be very useful to firms and policy makers whose decisions may affect price and therefore affect qd. Other things being equal, it will want to maximize its total revenue. Here"s where knowing the pri(cid:272)e elasticity of demand for its good is handy for a firm. It can tell whether it should raise or lower its price (assuming it has the ability to set price) Total revenue, tr is defined as price x the quantity traded: tr=(p)(q) Price elasticity of demand: is a measure of how much the quantity demanded of a good responds to a change in the price of that good. Will a small price change result in a proportionately bigger or smaller change in quantity demanded. The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price.

Related Questions

interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

inelastic demand

inframarginal units

marginal revenue

point elasticity

price effect

quantity effect

total revenue

unitary elastic demand

1. __________________ A measure of consumersâ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

coffeehornet269

From the scenario for Katrinaâs Candies, examine the procedure Herb will use to estimate the "demand model" for this product and comment on the expected price elasticity, income elasticity, and cross price elasticity of demand. That is, do you expect demand to be price elastic or inelastic? Will the income elasticity suggest Katrina Candies is a luxury or a necessary good? And, is there likely to be a strong cross price elasticity with the other products that Herb included in his demand model? Explain your answers. What can you determine about consumer demand for a product whose estimated demand elasticities are as follows: Price Elasticity of demand is -0.85 Income Elasticity of demand is 2.5 Cross Price Elasticity of demand with this product and your product is -2 I would like you to think about this simple formula for predicting the change in total revenue when there is a given percentage change in price. Using the example above, if ED (price elasticity of demand) is -.85, then a 10% increase in price will cause the quantity demanded to fall by 8.5%, (-8.5% / 10% = -.85). The Formula for Predicting % Changes in Total Revenue is: %ÎTR = %ÎQ + %ÎP where TR = Total Revenue, Q is Quantity Demanded and P = price. Using this formula, what would be the % Î in TR if ED is -.85 and the %ÎP is 10%?

lilaccattle807

A Steel Supply and Demand for the USA are given by Demand: P = 1200 - 100 (QD) and supply: P = 100 (QS) where QD = quantity demanded and QS = quantity supplied. Assume the selling price is $700 and the firm decreases the price of the product. Will the total revenue falls or increases. Why? Illustrate graphically the relationship between elasticity, price and total revenue by identifying the revenue maximization price and revenue maximization output?

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ECON 1B03 Lecture Notes - Lecture 4: Demand Curve

ECON 1B03 Full Course Notes

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