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Lecture 6

Lecture 6-Elasticity of Demand

5 Pages
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Department
Economics
Course Code
ECO101H1
Professor
Jack Carr

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Thursday, October 1st, 2009.
Elasticity of Demand
Insight: If the choice is between A or B, you need information about A and B.
If you have decided on A, information about B (only) is required to identify the
opportunity cost of A if B is the next best alternative to A.
Total Revenue ± Price x Quantity
Questions:
1) If Toronto Transit commission wished to increase Total Revenue, should it
increase price (fare)?
2) You own one of the 5 toll bridges across a river, each of which sets the price (toll)
at $5.00.
If you wish to increase Total Revenue, should you increase price (toll)?
Fare increase: (1) For those who continue to ride the TTC, fares will be higher,
BUT
(2) There will be fewer riders (per the law of downward-sloping
demand)
Result: Law of downward-sloping demand is not sufficient to answer question.
(Price) Elasticity of Demand
Definition: Percent change in quantity demanded /
Percent change in price
% ¨4D
¨3 (Ignore minus sign)
Measures responsiveness of quantity demanded to a change in price.
Mid-point Convention
¨4 = ¨4
Q (Q = Average quantity)
¨3 ¨3
P (P = average price)
www.notesolution.com
Example:
Situation Price Quantity Demanded
A 0.90 1100
B 1.10 900
¨4XDQWLW\'HPDQGHG = 200 x 100
(1100 + 900)/2
= 200 x 100
1000
= 20%
¨3ULFH = 0.2 x 100
(0.9 + 1.10)/2
= 0.20 x 100
1.00
= 20%
ELASTICITY = 20% = 1.0
20%
Insight: same result if go up demand curve from A to B or down demand curve
from B to A!
Terminology:
perfectly inelastic: elasticity = 0
inelastic: 0 < elasticity < 1
unit elastic: elasticity = 1
elastic: 1 < elasticity <
perfectly elasticHODVWLFLW\
#1 % ¨3 
¨4D = 20 elasticity = 20 / 10 = 2
Æ Quantity demanded is very responsive to a change in price
#2 % ¨3 
¨4D = 2 elasticity = 2 / 10 = 0.2
Æ Quantity demanded is not very responsive to a change in price
www.notesolution.com

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Description
Thursday, October 1st, 2009. Elasticity of Demand Insight: If the choice is between A or B, you need information about A and B. If you have decided on A, information about B (only) is required to identify the opportunity cost of A if B is the next best alternative to A. Total Revenue ± Price x Quantity Questions: 1) If Toronto Transit commission wished to increase Total Revenue, should it increase price (fare)? 2) You own one of the 5 toll bridges across a river, each of which sets the price (toll) at $5.00. If you wish to increase Total Revenue, should you increase price (toll)? Fare increase: (1) For those who continue to ride the TTC, fares will be higher, BUT (2) There will be fewer riders (per the law of downward-sloping demand) Result:Law of downward-sloping demand is not sufficient to answer question. (Price) Elasticity of Demand Definition: Percent change in quantity demanded / Percent change in price % ¨" D ¨! (Ignore minus sign) Measures responsiveness of quantity demanded to a change in price. Mid-point Convention ¨" = ¨" Q (Q = Average quantity) ¨! ¨! P (P = average price) www.notesolution.com Example: Situation Price Quantity Demanded A 0.90 1100 B 1.10 900 ¨":,39L9\02,3/0/ = 200 x 100 (1100 + 900)/2 = 200 x 100 1000 = 20% ¨!7L.0 = 0.2 x 100 (0.9 + 1.10)/2 = 0.20 x 100 1.00 = 20% ELASTICITY = 20% = 1.0 20% Insight: same result if go up demand curve from A to B or down demand curve from B to A! Terminology: perfectly inelastic: elasticity = 0 inelastic: 0 < elasticity < 1 unit elastic: elasticity = 1 elastic: 1 < elasticity < ’ perfectly elastic0O,89L.L9\’ #1 % ¨! ¨"
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