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Lecture

# Lecture Six: Elasticity (Continued)

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School
York University
Department
Economics
Course
ECON 1000
Professor
George Georgopoulos
Semester
Fall

Description
Lecture 6: Elasticity (Continued) September 29, 2011 Total Revenue and Elasticity The total revenue from the sale of a good or service equals the price of the good multiplied by the quantity sold. A change in the price always creates a change in the quantity sold, however this does not always mean an increase in total revenue. The change in total revenue due to a change in price depends on the elasticity of demand: If demand is elastic, a 1% price cut increases the quantity sold by more than 1% and the total revenue increases. If demand is inelastic, a 1% price cut decreases the quantity sold by more than 1% and the total revenue decreases If the demand is unit elastic, a 1% cut in the price increases the quantity sold by 1% and the total revenue remains unchanged. Total Revenue Test A method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change, when all other influences on the quantity sold remain the same. Your Expenditure and Elasticity If you demand is elastic, a 1% price cut increases the quantity you buy by more than 1% and your expenditure on the item increases. If your demand is inelastic, a 1% price cut increases the quantity you buy by less than 1% and your expenditure decreases. If your demand is unit elastic, a 1% price cut increases the quantity you buy by 1%, so your expenditure remains the same. The Factors the Influence the Elasticity of Demand The closeness of substitutes - The closer the substitute for a good or service, the more elastic are the demands for it. - Necessities, such as food and housing generally have inelastic demand - Luxuries, such as vacations, generally have elastic demand The proportion of income spent on the good - the more you spend on a given good, the more sensitive (or elastic) you will be to price changes. The time elapsed since a price change - the more time you have, the more elastic you are to the price of the good. More time means you have mo
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