Economics 1021A/B Lecture 5: Lecture 5 (Chapter 4)

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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 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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