ECON 1000 Midterm #2 – study notes
Price Elasticity of Demand
What is elasticity?
- always think about percentage changes: |E | d %∆Q ÷%∆P
- if |d | >1, elastic
o 1% ↓P results in >1% ↑Q
- if |d | =1, unit elastic
o 1% ↓P results in 1% ↑Q
- if |d | =1, inelastic
o 1% ↓P results in <1% ↑Q
What is perfect inelasticity?
- example: vial of insulin for diabetics
o if P↓, Q will not increase
o if P↑, Q will not decrease
o they need it so they will continue to buy; Q will remain the same
d
- perfectly inelastic demand curve:
What is perfect elasticity?
- example: vending machines both selling coke
o A sells 200 for $1 and B sells 200 for $1 also (perfect sub; comparable)
o if A ↑ (small change, from $1 to $1.01) and P Bemains $1, then everyone goes to B,
causing Q B
o if A ↓ (small change, from $1 to $0.99) and P bemains $1, then everyone comes to A,
causing Q B
o perfectly elastic demand curve: ECON 1000 Midterm #2 – study notes
Constant Unit Elasticity
- %∆Q=%∆P
- a demand curve with constant unit elasticity:
Revenue and Elasticity
- TR = Q*P
- when plotting TR against Q / plotting TR against P (both are parabolic shapes), there will be
some P, Q combination that will maximize TR (the vertex of the parabola)
- in an elastic section of thecurve, ↓P, ↑Q alot ∴ TR↑
- in a unit elastic section of thecurve, ↓P ↑Qsame amount ∴TR does not change
- in an inelastic section of the curve, ↓P, ↑Q abit ∴ TR↓
Cross Elasticity of Demand (CED)
- price of one good affecting quantity of another
- example: substitute goods (airline tickets)
o perfect sub implies CED ∞
o PA= P B $1000 and Q = QA= 20B tickets
o then PA↑ to $1050 ∴ Q B to 400 and Q A to 0
%∆P =A(+50/1025avg) ∼ 4.9%
%∆Q =B(+200/300avg) ∼ 67%
o CED for B in relation to A is (67%/4.9%) = 13.4
- example: complement goods (e-book and e-reader)
o perfect comp implies CED -∞
o complements of each other
e-readers are A; e-books are B
P A then Q B
P A then Q B
- example: unrelated goods (random)
o CED= 0
o basketballs vs. e-books
o price of basketballs goes down; no effect on quantity of e-books demanded; no %
change in e-books, then numerator is zero therefore there is no CED ECON 1000 Midterm #2 – study notes
Demand Curve as Marginal Benefit Curve
- demand curve can be a marg

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