ECON101 Lecture 4: Chapter 4 Elasticity
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Price elasticity of demand: price elasticity of demand units free measure of the responsiveness of the quantity demanded of a good to a change in price, ceteris paribus. Since as price increases, quantity demanded decreases, price elasticity is a negative number: magnitude or absolute value tells us how responsive the quantity demanded is, so the negative sign is ignored. If price elasticity is 4, for every 1% increase in price, there is a 4% decrease in quantity demanded. Total revenue and elasticity: total revenue = price * quantity, when price changes, so does revenue, total revenue test can estimate the elasticity of demand by observing the revenue changes due to a. If demand is elastic, increasing the price will decrease revenue. If demand is inelastic, increasing the price will increase revenue. If demand is unit elastic, increasing the price will not change the total revenue price change. If a price cut leaves total revenue unchanged, demand is unit elastic.