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Lecture

Elasticity of Demand

6 Pages
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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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Description
Topic 4 J Elasticity of Demand th th (Week 3-4 Sep 29 J Oct 4 ) 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 $10bottle? 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; :Z]oo Z}K}Z^o}}L-Zo}]L2KL:_ Revenue = price X quantity; price goes up while quantity sold goes down. Should you raise your price? Thus introduced the concept of ^9] oZ] ]}KL_. 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 = %Q D % 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) %Q = Q D (change in quantity demanded over average quantity demanded); Q D avg %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 J calculating percentage change Situation Price Quantity Demanded % Q = 200 20%; A 0.90 1,100 1000 % P = 0.2 = 20% B 1.10 900 1 2. Terminology D Perfectly inelastic e=0 Q }ZL[ ZL2L}KZ}] ZL2Z Inelastic 0 < e < 1 Q is not very responsive to a change in price; D Unit elastic e=1 Q Dhanges at the same pace as the price; Elastic ,,L Q is very responsive to a change in price; Perfectly elastic )L Q is unlimited at certain price; and zero if price changes; ECO100Y1-Pesando-Notes edited by Eva Wu www.notesolution.com
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