Class Notes (810,830)
Economics (934)
Lecture

Microecon 1021A - Chapter 4

4 Pages
59 Views

School
Western University
Department
Economics
Course
Economics 1021A/B
Professor
Ronald Wintrobe
Semester
Fall

Description
Chapter 4 Elasticity Price Elasticity of Demand • When supply increases, the equilibrium price falls and the equilibrium quantity increases. • Sometimes the price change is large and the quantity change is small or sometimes the price change is small and the quantity change is large. • The size of the change in equilibrium quantity and equilibrium price when supply changes depend on the responsiveness of the quantity demanded to a change in price. • The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same. • Price elasticity of demand is equal to the percentage change in the quantity demanded divided by the percentage change in price. • Study p. 85 in your textbook. Notice that to calculate the price elasticity of demand, we express the changes in price and quantity demanded as percentages of the average price and the average quantity. • When the price of a good rises, the quantity demanded decreases along the demand curve. • So if we consider that the change in price and the change in quantity demanded are in opposite directions, then the price elasticity of demand is a negative number. • It is the magnitude of the price elasticity of demand that tells us how responsive demand is. • To compare elasticities, we use the magnitude of the price elasticity of demand and ignorethe minus sign. We always report the price elasticity of demand as apositive number. • If the quantity demanded remains constant when the price changes, then the price elasticity of demand is zero and the good is said to have perfectly inelastic demand. o The demand curve is vertical. • If the percentage change in the quantity demanded equals the percentage change in price, then the price elasticity of demand equals 1 and the good is said to have unit elastic demand. • If the percentage change in the quantity demanded is less than the percentage change in price, the good is said to have inelastic demand. • If the quantity demanded changes by an infinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity and thegood is said to have perfectly elastic demand. o The demand curve is horizontal. • If the percentage change in the quantity demanded exceeds the percentage change in price, the good is said to have elastic demand. • The figure below shows the elasticity along a straight-line demand curve. • At a high price and small quantity, elasticity is large. • At a low price and large quantity, elasticity is small. • At the mid-point price and quantity, elasticity is 1. • The total revenue from the sale of a good equals the price of the good multiplied by the quantity sold.
More Less

Related notes for Economics 1021A/B

OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.