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Lecture 4

WEEK 4.docx

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ECON 1000
George Georgopoulos

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WEEK 4 CHAPTER 4: ELASTICITY Elasticity – responsiveness of the quantity to a change in price Measure of responsiveness that is independent and does not use units Price elasticity of demand – responsiveness of the quantity demanded of a good, to a change in its price Express percentages over the average price and average quantity (the midpoints between original and new) Elasticity will be the same if the price drops or falls by the same dollar amount (ignore negatives and focus on the magnitude) Elasticity is the ratio of two percentage changes (proportionate) Percentage change in each variable is independent (price and quantity) Perfectly inelastic demand – quantity demanded doesn’t change when price changes Unit elastic demand – 1 percent change in price = 1 percent change in quantity demanded Inelastic demand – percentage change in quantity demanded is less than percentage change in price (between 0 and 1) Perfectly elastic demand – demand changes by an infinitely large amount in response to a tiny change in price (having 2 coke machines next to each other with different prices perfect substitute) Elastic demand – percentage change in quantity demanded is greater than percentage change in price (between 1 and infinity) textbook is wrong If the curve is a straight line, above the midpoint demand is elastic, below is inelastic, and at the midpoint it is unit elastic. Total revenue – price of good times units sold If elastic  1 percent price cut increases quantity sold by more than 1% If inelastic  1 percent price cut increase quantity sold by less than 1% If unit elastic  1 percent price cut = 1 percent increase in quantity sold Total revenue test – estimate the price elasticity of demand by observing change in total revenue from a change in price Price cut increases total revenue  elastic demand Price cut decreases total revenue  inelastic demand Price cut doesn’t change total revenue  unit elastic (total revenue is at maximum) Elasticity of demand for a good depends on: Closeness of Substitutes – necessities have inelastic demand wh
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