EC 110 Lecture Notes - Lecture 4: Normal Good
Chapter 5: Applications of Demand and Supply-Elasticity
1. Basic Concepts
1. P x Q = TR
1. P- price
2. Q- quantity demanded
3. TR- total revenue
4. Unit Elastic Change
1. proportional change
2. ex: P increases by 20 percent, Q decreases by 20 percent, so TR
stays the same
5. Elastic Change
1. greater than proportional change
2. ex: P increases by 20 percent, Q decreases by 25 percent, so TR
decreases
6. Inelastic Change
1. less than proportional change
2. ex: P increases by 20 percent, Q decreases by 10 percent, so TR
increases
3.
2. Price Elasticity of Demand
1. Price Elasticity of Demand = (% Change in Q) / (% Change in P)
1. = 1 ā unit elastic
2. < 1 ā inelastic
3. > 1 ā elastic
3. Numerical Coefficient of Elasticity (E)
1. Ed = (Change in Q / Change in P) x [ .5(P1 + P2) / .5(Q1 + Q2) ]
4. Price Elasticity of Supply
1. As P increases, Q supplied also increases
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