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Chapter 6

Chapter 6 - Markets in Action.docx

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University of Waterloo
ECON 101
Shi Lei Niu

CHAPTER 4 – ELASTICITY Price Elasticity of Demand The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same Calculating Price Elasticity of Demand  Price Elasticity of Demand = percentage change in Q demanded / Percentage change in P  The ratio of two percentage changes  Units-free measure because percentage change in each variable is independent of units which the variables are measured  When P of good rises, Q demanded decreases  Positive change in price beings negative change in Q -> price elasticity is negative  Absolute value of price elasticity = how responsive/elastic demand is Inelastic and Elastic Demand  If Q demanded remains constant when P changes, price elasticity of demand is zero = perfectly inelastic demand  If % change in Q demanded = % change in P, then price elasticity is one = unit elastic demand  If elasticity of demand is between zero and 1 then inelastic demand  If Q demanded changes by large % in response to tiny price change, price elasticity of demand is infinity and good is perfectly elastic demand  If % change in Q demanded exceeds % change in P then elastic demand Total Revenue and Elasticity  Total revenue from sale of good equals price of good x quantity sold  If D is elastic, a 1% P cut increases Q sold by more than 1% and TR increases  If D is inelastic, a 1% P cut increases Q sold by less than 1% and TR decreas
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