25 Aug 2016

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Lecture 5 - Elasticity, CHAPTER 4

Price Elasticity of Demand = Percentage change in quantity demanded

Percentage change in price

This measures the responsiveness of the change in a demand of a product when the price of this

product changes, assuming all other influences stay the same.

We find the nominator and denominator by calculating averages for demand and price. The original

price plus the new price, divided by 2, then put the difference between original and new over that

average. This calculation gets your average price. Do the same for the quantity

Inelastic and Elastic Demands

If the quantity demanded does not change when the price changes then then it is called a

perfectly inelastic demand...elasticity = 0

If the percentage change of price and demand are equal, the elasticity = 1. This is called unit

elastic demand.

And good within the range of these two: 0 to 1 is said to have an inelastic demand.

If the quantity demanded changes by an infinity large percentage for every tiny price change, it

is said to have a perfectly elastic demand. Where elasticity = ∞

Any goods which have an elasticity of greater than 1 are said to have an elastic demand.

TOTAL REVENUE AND ELASTICITY

Total revenue is calculated by taking the price of the goods sold, multiplied by the total # of goods sold.

Total revenue depends on elasticity of demand:

if a price cut increases total revenue, demand is elastic

if a price cut decreases total revenue, demand is inelastic

if a price cut doesn’t change revenue, demand is unit elastic.

Factors influencing elasticity

Closeness of substitutes – if people can buy another product instead of yours, then your product is

elastic. Meaning if u lower the price, they may buy yours over the substitutes and revenues will go up.

Proportion of income spent on the good – a very cheap item is inelastic, cause say if gum prices double,

u will still pay the 2 bucks for gum, if car prices double, u may look for alternative transportations, so car

demand is elastic.

Time elapsed since price change – the longer the time that has elapsed since a price change, the more

elastic is demand.

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