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ECON 1900 (22)

# Ch 4 Price Elasticity of Demand and supply note new.pdf

6 Pages
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School
Thompson Rivers University
Department
Economics
Course
ECON 1900
Professor
Nancy Carson
Semester
Winter

Description
Price Elasticity of Demand Responsiveness of Quantity demanded to a change in price. % Q d Q d averageQ d E d % P P averageP Since the price elasticity of demand is always negative we ignore the negative sign. Elastic Quantity demanded responds a lot E > 1 d %ΔQ >d%ΔP Inelastic Quantity demanded does not responds a lot Ed< 1 %ΔQ < %ΔP d Unitary Elastic Ed= 1 %ΔQ =d%ΔP If d = 2, then the percent change in quantity is twice the percent change in price. (for example: 1% increase in price leads to a 2% decrease in quantity.) Elasticity of demand varies along a straight line demand curve. Price 10 8 6 4 2 0 2 4 6 8 10 Quantity Price E >1 d E d 1 E d1 D Quantity Relationship between Total Expenditure (Total Revenue) and Price Elasticity of Demand. Price 10 8 6 4 2 0 2 4 6 8 10 Quantity TR 24 20 16 12 8 4 0 2 4 6 8 10 Quantity Total Revenue and the Price Elasticity of Demand: TR = P × Q If at the current price, demand is elastic then an increase in price will reduce total revenue. ↓ TR = ↑ P × ↓ Q If at the current price, demand is inelastic then an increase in price will increase total revenue. ↑ TR = ↑ P × ↓ Q If at the current price, demand is unitary elastic then an increase in price will not change total revenue. TR = ↑ P × ↓ Q Special Cases: P P Demand is perfectly elastic Demand is perfectly inelastic D D Q Q P Demand is unitary elastic D
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