Textbook Notes (363,473)
Economics (800)
ECON 1050 (379)
Chapter 4

# Microeconomics - Chapter 4.docx

4 Pages
130 Views

School
University of Guelph
Department
Economics
Course
ECON 1050
Professor
Semester
Fall

Description
Microeconomics - Chapter 4 Price Elasticity of a Demand – is a units-free measure of the responsiveness of the quantity demanded of a good to change in its price when all other influences on buying plans remain the same Perfectly Inelastic Demand - if the quantity demanded remains constant when the price changes, then the price elasticity of demand is zero Unit Elastic Demand – if the percentage change in the quantity demanded equals the percentage change in the price, then the price elasticity equals 1 Inelastic Demand – price elasticity of demand is between 0 and 1 Perfectly Inelastic Demand – if the quantity changes by an infinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity (the demand for a good that has a perfect substitute is perfectly elastic) Elastic Demand – the price of elasticity demand is greater than 1 Total Revenue – the value of a firm’s sales. It is calculated as the price of the good, multiplied by the quantity sold. Demand is elastic: 1% price cut increases quantity sold by more than 1% and total revenue increases. Demand is inelastic: 1% price cut increases quantity sold by less than 1% and total revenue decreases. Demand unit is elastic: 1% price cut increases quantity sold by 1% and total revenue does not change. Price cut in elastic range brings an increase in total revenue- percentage increase in the quantity demanded is greater than the percentage decrease in price. Price cut in inelastic range brings a decrease in total revenue- percentage increase in the quantity demanded is less than the percentage decrease in price. Unit elasticity- total revenue is at maximum. Total Revenue Test – method of estimating the price elasticity of demand by observing the change in the price, when all other influences on the quantity sold remain the same. Price cut increases total revenue: Demand is Elastic Price cut decreases total revenue: Demand is Inelastic Price cut leave total revenue unchanged: Demand is Unit Elastic Demand is Elastic: 1% price cut increases quantity you buy by more than 1% and expenditure on item increases. Demand is Inelastic: 1% price cut increases quantity you buy by less than 1% and expenditure on the item decreases. Demand is Unit Elastic: 1% price cut increases quantity you buy by 1% and expenditure on item does not change. Factors the Influence Elasticity of Demand: 1. Closeness of Substitutes A necessity has less substitutes = inelastic demand A luxury has many substitutes = elastic demand 2. Proportion of Income Spent on Good Greater proportion of income spent = elastic
More Less

Related notes for ECON 1050

OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.