ECON220 Lecture 4: Economics Chapter 4

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ambersardine152

5 May 2018

School

University of Waterloo

Department

Economics

Course

ECON220

Professor

Owen Gallupe

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Economics Chapter 4:

Elasticity of Demand:

• Measures the responsiveness of demand to a change in price of the commodity, a

change in income, and a change in the price of other related commodities

o For example: If the price of the commodity goes up by 20%, will the quantity

demanded increase by 20%, by less than 20%, or by more than 20%

o If income goes up by 15%, will the demand for the good increase by 15, by less

than 15, or by more than 15%

o If the price of cars increases by 30%, will the demand for tires increase by 30%,

less than 30%, or more than 30%

o If the price of oil goes up by 25%, the demand for natural gas increase by 25%,

less than 25%, or more than 25%

Forms of Elasticity of Demand:

1. Price of elasticity of demand (Ep)

2. Income of elasticity of demand (EY)

3. Cross elasticity of demand (Exy)

Price of Elasticity of Demand

• Measures the responsiveness the quantity demanded to a change in the price of the

commodity

• Ep= % change in the quantity demanded/ % change in the price of the commodity

Range of results for Ep

1. If Ep=1, it is the uita pice elasticit of dead eaig… % chage i uatit

demanded is exactly = to the % change of the price of the commodity

2. If 0< Ep<1: inelastic price of elasticity of demand … % change in quan dem is less than

the change of the price of the quan

3. Greater than 1 but less than infinite we end up with elastic price elasticity of demand

eaig… % chage i ua deaded eceeds the % chage i the pice of the

commodity

4. If Ep= 0: Perfectly inelastic price elasticity of demand quan demanded will not respond

to a change in price

5. Ep= to infinite: Pefectl elastic pice of elasticit of dead … Meaig ua deaded

can change without changing the price (Small change in price can be a big price in

demand)

Perfectly Inelastic Demand Curve

Factors Affecting Prices Elasticity of demand

1) Price of more elastic demand of demand or commodity is more elastic given the

available of close substitute of the commodities

a. P Increases, Q Decrease and becomes more

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Document Summary

If income goes up by 15%, will the demand for the good increase by 15, by less than 15, or by more than 15% If the price of cars increases by 30%, will the demand for tires increase by 30%, less than 30%, or more than 30% If the price of oil goes up by 25%, the demand for natural gas increase by 25%, less than 25%, or more than 25% Forms of elasticity of demand: price of elasticity of demand (ep, income of elasticity of demand (ey, cross elasticity of demand (exy) Price of elasticity of demand: measures the responsiveness the quantity demanded to a change in the price of the commodity, ep= % change in the quantity demanded/ % change in the price of the commodity. Price elasticity of demand and total revenue: p x the number of units sold at that price, tr= pxq. If price elasticity of demand is unitary (ep=1)

Related Questions

a) What is the advantage of using the price elasticity rather than the slope of the demand curve or its inverse to measure the responsiveness in the quantity demanded of a commodity to a change in its price?

b) Why and how is the formula for arc price elasticity of demand different from the formula for point price elasticity of demand?

lemonsea-lion739

Discussion #1

The law of demand states that a fall in the price of a good raises the quantity demanded, and the increase in price leads to a decrease in quantity demanded. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price, and the percentage change in quantity demanded is greater than the percentage change in price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price, which indicates that the percentage in price is greater than the percentage in quantity demanded.

However, the extent of responsiveness of quantity demanded to a change in price depends on the nature of a particular good or service in the market. The price elasticity of demand partly depends on the availability of close substitutes. When a large number of substitutes are available, consumers respond to a higher price of a good by buying more of the substitute goods and less of the relatively more expensive good. In addition, goods or services that are considered necessities tend to have less elastic (more inelastic) demand, whereas goods or services that are considered luxuries have more elastic (less inelastic) demands.

Explain why the demand for the good or service provided by the organization you work for is elastic or inelastic. How does this influence pricing decisions?
Provide examples on how the availability of close substitutes affects price elasticity of demand.
Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

Please answer ALL bulletins and place the answers under the correct bulletin.

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.

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ECON220 Lecture 4: Economics Chapter 4

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