Chapter 5: Elasticity and its Application

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Price elasticity of demand=percentage change in qs / percentage change in p y measures how much qd responds to a change in p y y disregard negative sign. Calculating percentage changes: y midpoint method y midpoint is the number halfway between the start & end values, the average. End value start value / midpoint x 100 of those values: doesn t matter which value you use as start or end . The variety of demand curves: y price elasticity of demand is closely related to the slope of the demand curve y the flatter the curve, the bigger the elasticity, the steeper the curve, the smaller the elasticity. Revenue = p x q y price increase has two effects on revenue: higher p means more revenue on each unit, but you sell fewer units (lower q) due to law of demand. Income elasticity of demand: measures the response of qd to change in consumer income.

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