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ch 04 elasticity.docx

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Department
Economics
Course
ECON 101
Professor
Eva Lau
Semester
Fall

Description
04 -elasticity Chapter 4: Elasticity Price Elasticity of Demand  when there are changes to supply and demand, there’s a change in price and quantity  how much do the price and quantity change? Demands on the responsiveness of the quantity demanded to a change in price  different outcomes arise from differing degrees of responsiveness of the quantity demanded to a change in price  price elasticity of demand: 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 buying plans remain the same Calculating Price Elasticity of Demand percentage changeinquantity demanded  price elasticity of demand = percentage changeinprice  need to know the q at different prices when all other influences on buying plans remain the same d  changes in price and qdare expressed as percentages of the average price and average quantity  percentage change = change/average Inelastic and Elastic Demand  perfectly inelastic demand: quantity demanded remains constant when the price changes  price elasticity of demand is 0 (vertical)  ex – a very low price elasticity of demand is insulin  unit elastic demand: the percentage change in the quantity demanded equals the percentage change in the price  the price elasticity is 1  inelastic demand: the price elasticity of demand is between 0 and 1  food, shelter, etc  perfectly elastic demand: the quantity demanded change by an infinitely large percentage in response to a tiny price change  the price elasticity of demand is infinity (horizontal)  elastic demand: the price elasticity of demand is between 0 and 1  automobiles, furniture, etc Elasticity Along a Straight-Line Demand  elasticity and slope are not the same; but related  ex – price falls from $25 to $15 a pizza, quantity demanded increases from 0 to 20 pizzas an hour  the average price is $20 a pizza, and the average quantity is 10 pizzas ΔQ/Q ave 20 / 10  priceelasticity of demand = ΔP/P = 10 / 20 = 4 ave  the price elasticity of demand at an average price of $20 is 4  the price elastic of demand at different average prices are different  on a straight-line demand curve, elasticity decreases as the price falls and the quantity demanded increases  demand is unit elastic at the midpoint of the demand curve  above the midpoint; demand is elastic  below the midpoint; demand is inelastic Total Revenue and Elasticity  total revenue from the sale of a good equal the price of the good multiplied by the quantity sold  when a price changes, the total revenue also changes  the change in revenue depends on the elasticity of demand page 1 of 3 04 -elasticity  elastic: price cut -> large increase in qd and total rev increases  inelastic: price cut -> small increase in qd and total rev decreases  unit elastic: 1% price cut increases quantity sold by 1% and total rev does not change  total revenue test: a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences stay the same  price cut increases total rev; demand is elastic  price cut decreases total rev; demand is inelastic  price cut doesn’t change total rev; demand is unit elastic Your Expenditure and Your Elasticity  when prices change, the change in your spending on the goods depends on your elasticity of demand  elastic: a decrease in price causes a large increase in expenditure  inelastic: a decrease in price causes a small increase in expenditure  elastic: 1% decrease in price causes 1% increase in The Factors that Influence the ElasticityofDemand  the closeness of substitutes  the closer the substitutes, the more elastic the demand  oil has substitutes, but none are currently very close -> demand for oil is inelastic  necessities: food, shelter (inelastic)  luxuries: exotic vacations (elastic)  the proport
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