CHAP 4

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Department
Economics
Course
Economics 1021A/B
Professor
Jeannie Gillmore
Semester
Fall

Description
Econ 1021 – Chap 4 Price Elasticity of Demand  Supply increase  equilibrium price falls  equilibrium quantity increase  Large price change  small quantity change  Small price change  large quantity change  Price elasticity of demand  units-free measure of responsiveness of quantity demanded of a good to a change in price when all other inluences on buying plans stay the same Calculating Elasticity of Demand  Price elasticity of demand = percentage change in quantity demanded ________________________________________________ percentage change in price  Express change in price as percentage of average price  Change in quantity demanded as percentage of avg quantity  Orig price – $20.50  new price $19.50  Price change $1 --> average price is $20/pizza Average Price and Quantity  Avg price/quantity  most precise measurement of elasticity --> midpoint b/w original and new  Price fall from 20.50 to 19.50 --> $1 change is 4.9 percent of 20.50  2 pizza change in quantity is 22.2% of 9 pizzas  Price elasticity of demand is 22.2/4.9 = 4.5 Percentage and Proportions  Elasticity --> ratio of 2 percentage changes  When divide one percent by another – 100s cancel  Percentage change is a proportionate change multiplied by 100  Proportionate change in price is delta p/p avg  Proportionate change in quan demanded is delta q/q avg  Divide answer if q/p --> same answer as percentage changes Units-Free Measure  Elasticity --> units free measure --> percentage change in each variable is dependent of units in wihich variable is measured  Ratio of 2 percentages --> # w/o units Minus Sign and Elasticity  Price of good rise --> quantity demanded decrease  b/c pos change in price brings neg change in quan demanded  price elasticity of demand = neg number  abs value of price elasticity of demand that tells us how responsive quan demanded is  compare price elasticities of demand --> use mag of elasticity and ignore minus sign Inelastic and Elastic Demand  Perfectly inelastic demand --> price change --> quan demanded remains contast --> price elasticity of demand = 0  eg. Insulin --> imp to diabetics --> if price change --> does not change quan bought  unit elastic demand --> % change in quan demanded = % change in price --> price elasticity = 1  In elastic demand --> %change in quan demanded < % change in price --> elasticity b/w 0-1 --> eg. Food, shelter  Perfectly elastic demand --> quan demand changes by infinitely large % --> response to tiny price change --> eg 2 vending machine same price --> some buy from each --> one more exp then other --> buy from cheaper  Elastic demand --> % change quan demanded > change in price e  Eg. Car, furniture Total Revenue and Elasticity  Total rev from sale of good = price of good x quantity sold  Demand elastic --> 1% price cut --> increase quantity sold/buy greater than 1% --> revenue increases --> expenditure on item increases  Demand inelastic --> 1% price cut --> increase quan sold/buy less than 1% -- > total revenue decreases --> expenditure on item decreases  Demand is unit elastic --> 1% price cut --> increase quan sold/buy by 1% --> total revenue does not change --> expenditure does not change  Price cut increases total revenue --> demand is elas
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