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Chapter 6

# Chapter 6 - Markets in Action.docx

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University of Waterloo

Economics

ECON 101

Shi Lei Niu

Winter

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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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