01:220:102 Lecture Notes - Lecture 6: Inferior Good, Normal Good

• School: Rutgers University
• Department: Economic
• Course: 01:220:102
• Professor: Rubin

Document Summary

Why does it matter whether demand is unit elastic, inelastic or elastic. Because this classification predicts how changes in the price of a good will affect the total revenue earned by producers from the sale of tat good. Negative is unit elastic, -1 to 0: unit elastic. Price and quantity change cancel each other out revenue stay the same. Total revenue is defined as the total value of sales of a good or service: total revenue= price x quantity sold. A price effect: after a price increase each unit sold sells at a higher price. Quantity effect: sell fewer units after a price increase. Elastic if demand if elastic the price of elasticity of deamns is greater than 1 an increase in price reduces total revenue. In this case the quantity effect s stronger than the price effect. If demand for a good is inelastic the price elasticity of demand is less then 1 a higher price increases total revenue.