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Lecture

# Oct 10th, 2013.docx

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School
University of Ottawa
Department
Economics
Course
ECO1104
Professor
David Gray
Semester
Fall

Description
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.  Difficult point - The D curve for inelastic goods is relatively steep - The D curve for elastic goods is relatively flat  BUT - 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 forever? - As P increase, PED increases, so eventually we will end up on the elastic portion of the demand curve. - 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 zero? - As P decrease, PED decreases, s eventually we will end up on the inelastic portion of the demand curve. - 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. Except that:  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 necessity) - “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?
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