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Chapter 4

ECON 1B03 Chapter Notes - Chapter 4: Demand Curve, Ice Cream Cone, HyperbolaPremium


Department
Economics
Course Code
ECON 1B03
Professor
Hannah Holmes
Chapter
4

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Price Elasticity of Demand
Elasticity
Measures the responsiveness of quantity demanded or quantity supplied is to changes
in price or other determinants
If price changes, will quantity demanded change by a little, or a lot
Important for firms to know how to maximize sales
Total revenue
Total Revenue = Price x Quantity Sold
Graph
Price elasticity of demand
How much the quantity demanded of a good responds to a change in the price of that
good
Equation
Ep = % change in quantity demanded / % change in Price
The result is
The coefficient of elasticity
How responsive demand is to a change in price
The larger the coefficient, the more responsive demand is
Types of price elasticity of demand
Inelastic demand
A change in price leads to a proportionately smaller change in quantity
demanded
Demand is not very responsive
Percentage change in price is greater than the percentage change in
quantity demanded
Ep < 1
Demand curve will be fairly steep

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Perfectly inelastic demand
Demand is not responsive at all to a price change
% change in quantity demanded will be 0
Ep = 0
Demand curve will be perfectly vertical
Elastic demand
Change in price leads to proportionately larger change in quantity
demanded
Demand is very responsive to a price change
Ep > 1
Demand curve will be fairly flat
Perfectly elastic demand
Change in price leads to and infinitely great change in quantity demanded
Demand is extremely responsive to a price change
Percentage change in quantity demanded approaches infinity
Ep = infinity
Demand curve will be horizontal
There are no real world examples
Unit elastic
Same change in price and quantity demanded
Ep = 1
Demand curve will be non linear
Total revenue must always be the same therefore is will be a
rectangular hyperbola
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