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Elasticity of Demand

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Jack Carr

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
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