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Lecture

ECO101H1 Lecture Notes - Demand Curve, European Route E20, Inferior Good


Department
Economics
Course Code
ECO101H1
Professor
Jack Carr

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ECO100Y1-Pesando-Notes edited by Eva Wu
Topic 4 t Elasticity of Demand
(Week 3-4 Sep 29th t Oct 4th)
z Opening Example:
You own the only spring in town, which produces sparkling water that you sell for $10 a bottle;
You have no costs, so that your profit equals your total revenue (price X quantity sold);
Q1. If you want to increase your revenue, should you raise your price above $10/bottle?
Q2. Would your answer change if these were other springs to town that also sold sparkling water?
Q1: If you raise your price:
a. consumer who continues to buy your water would pay more; you earns more money per bottle;
XZÁ]oo(Áµ}uµ}Z^oÁ}(}ÁvÁ-o}]vPuvX_
Revenue = price X quantity; price goes up while quantity sold goes down. Should you raise your price?
Thus introduced the concept of ^W]o]]Ç}(uv_.
z Price Elasticity of Demand
Elasticity of Demand measures the responsiveness of quantity demanded to a change in price.
Formula: Elasticity of demand = % Change in quantity demanded = %¸QD
% Change in price %¸P
(Due to the law of downward-sloping demand, the elasticity will be negative; just ignore the negative sign.)
1. Mid-Point Convention (calculating %change)
%¸QD = ¸QD (change in quantity demanded over average quantity demanded);
QDavg
%¸P = ¸P (change in price over average price)
Pavg
Insight: percentage change is the same with going up from A to B or going down from B to A on the curve.
e.g.1 t calculating percentage change
Situation
Price
Quantity Demanded
A
0.90
1,100
B
1.10
900
2. Terminology
Perfectly inelastic
e=0
QD }v[ZvPv}uZ}Á]ZvP
Inelastic
0 < e < 1
QD is not very responsive to a change in price;
Unit elastic
e=1
QD changes at the same pace as the price;
Elastic
íDDL
QD is very responsive to a change in price;
Perfectly elastic
AL
QD is unlimited at certain price; and zero if price
changes;
%¸QD = 200 20%;
1000
%¸P = 0.2 = 20%
1
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