Chapter 4 Economics
Price Elasticity Of Demand- a unit free of measure of the responsiveness of the
quantity demanded of a good to a change in price when all influences on buying
plans remain the same.
Figure 4.1 pg 84 shows example.
The slope of the two-demand curve depends on the units in which we
measure price and quantity.
Calculating Price elasticity of Demand
o To calculate the price of elasticity of demand for pizza we need to
know the quantity demanded of pizza at TWO different prices, when
all other influences on buying plans remain the same.
o Ex. Original price is 20.5 new price is 19.5 so average price is 20, and
price change is a dollar.
20.5-19.5/20= 1/20= 5%
The original demand is 9 pizzas and it grew to 11, the
average is 10 and the change is 2.
Price of Elasticity of demand=20%/5%=4
Average Price and Quantity
o We use average price and quantity because it gives us the most precise
measurement of elasticity, the midpoint between the two points. Example if
we didn’t use Average in textbook top of pg 86. The answers would vary.
o Elasticity is a units-free of measure because the percentage change in each
variable is independent of the units in which the variable is measured.
o Minus sign and elasticity- when the price of a good rises, the QD decreases,
because the positive change in price brings a negative change in the QD. The
price elasticity will be a negative number.
Inelastic and Elastic Demand
o Fig 4.3 covers the entire range of possible elasticity’s of demand. Pg 86.
o Perfectly inelastic demand- The quantity demanded is constant regardless
of the price, if the QD remains constant when the price changes, then the
price elasticity of demand is 0 and is said to have perfectly inelastic demand.
Ex- Insulin is in such important for diabetics that the quantity
demanded does not really change depending if the price falls.
o Unit Elastic Demand- If the percentage change in the quantity demanded
equals the percentage change in the price then the price elasticity equals 1
and the good has a unit of elastic demand.
o Inelastic Demand- The elasticity of demand is between zero and 1 and the
good is said to have an inelastic demand. (food and shelter). o Perfectly elastic demand- if the QD changes by an infinitely large
percentage in response to a tiny price change, then the price elasticity of
demand is infinity
o If the price elasticity is greater than one it is said to have an elastic demand.
Elasticity Along a Linear Demand Curve
o Elasticity and slope are not the same. A linear demand curve has constant
slope but a varying elasticity.
o Fig 4.4 (86) the mid point is calculated to have an elasticity of 1. Above the
midpoint, demand is elastic. Anything below that point is inelastic.
Total Revenue and Elasticity
o Total revenue- from the sale of a good equals the price of the good
multiplied nu the quantity sold.
o When price changes, total revenue also changes, but a cut in price does not
always change revenue.
o The change of Total revenue depends on the elasticity of demand in the
o If demand is elastic a 1% price cut increases the quantity sold by more
than 1% and total revenue increases.
ED>1 %changeQ> %changeP TR increases.
o If demand is inelastic, a 1% price cut increases the quantity sold by
less than 1% percent and total revenue decreases.
ED<1 %changeQ < %changeP TR decreases
o If demand is unit elastic, a 1 percent price cut increase the quantity
sold by 1% and revenue does not change.
ED=1 %changeQ = %changeP TR does not change.
o Total Revenue Test- is a method of estimating the price elasticity of demand
by observing the change in total revenue that results from a change in price,
when all other influences on the quantity sold remain the same.
o If price unit cut increases total revenue, demand is elastic.
o If price unit cut decreases total revenue, demand is inelastic
o If price cut leaves total revenue the same, demand is unit elastic.
Your Expenditure and Your Elasticity o When price changes, the change in your expenditure on the good
depends on your elasticity of demand.
o If your demand is elastic, and 1% price cut increases the quantity you
buy by more than 1% and your expenditure on the item increases.
o If your demand is inelastic, a 1% price cut increases the quantity you
buy by less than 1%, your expenditure on the item decreases.
o If your demand is unit elastic, a 1% price cut increases the quantity
you buy by 1% and your expenditure on the item you buy r