ECO 1104 B Oct. 10 , 2013
YUJIE YI #7038840
Look at Figure 5.4 (Midterm)
PED < 1, P increases (decreases), TR increases (decreases)
If PED = 0;5
- 0.5 = (%ΔQd) / (%ΔP)
If P increases by 10%, Qd decreases by 5%, and TR increases by about 5%.
PED = 1, P increases (decreases), TR remains constant
If PED = 1,
- 1 = (%ΔQd) / (%ΔP)
If P increases by 10%, Qd decrease by 10% and TR doesn’t change much.
Total Revenue is a wash – no change.
- The D curve for inelastic goods is relatively steep
- The D curve for elastic goods is relatively flat
- Every inelastic D curve has at least a range near the top which is elastic (high prices)
- Every elastic D curve has at least a range near the bottom which is inelastic (low prices)
Elasticity along a Straight-Line Demand Curve (like figure 5.5)
Elasticity is changing in every single point.
Higher elasticity for higher prices and lower elasticity for lower prices
1/4 For inelastic PED, we know that if P increases, TR increases. Why don’t firms increases prices
- As P increase, PED increases, so eventually we will end up on the elastic portion of the
- P must eventually reach equilibrium levels. If not, we will have a situation of excess
quantity supplied, which is unsustainable.
For elastic PED, we know that if P decreases, TR increases. Why don’t firms decrease prices to
- As P decrease, PED decreases, s eventually we will end up on the inelastic portion of the
P must eventually reach equilibrium levels. If not, we will have a situation of excess
quantity demanded, which is unsustainable.
Factors influencing the PED: Given 2 items which are almost identical.
If one is a LUXURY and one is a NECESSITY, the luxury good will have a higher PED
Expect the PED for higher education to be inelastic (because the higher education is a
- “If you think education is expensive, try ignorance” is a favorite line administrator.
One has SUBSTITUTE and one does not, then the good with substitutes will have a higher PED
Why is the demand for gasoline inelastic (especially in the short term), but the demand for
Esso gasoline so elastic?
Why is the demand for beer so inelastic?