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Chapter 5

ECON 101 Chapter Notes - Chapter 5: Midpoint Method

Department
Economics
Course Code
ECON 101
Professor
Ratna Shrestha
Chapter
5

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Elasticity & its Application
Elasticity: how buyers & sellers respond to changes in market conditions
Price elasticity of demand:
Measures response of quantity demanded to change in price
Elastic: substantial response (>1)
Inelastic: slight response (>1)
Factors of elasticity of demand:
1. Availability of close substitutes: close substitutes makes switching easy
2. Definition of market: narrow markets have more close substitutes
3. Necessities vs luxuries: necessities: inelastic, luxuries: elastic
4. Time horizon: goods have more elastic demand of long periods of time
Calculating price elasticity of demand:
point A: price = \$4 quantity = 120
point B: price = \$6 quantity = 80
change in quantity:
point A-B:


 point B-A:



Midpoint method:
point A: price = \$4 quantity = 120
point B: price = \$6 quantity = 80
price elasticity of demand=




=




Total revenue:
Amount paid by buyers & received by sellers of a good
Inelastic vs elastic demand:
o Inelastic: increase in price increase in total revenue
e.g. p from 4-5, qd from 100-90, r from 400-450
o Elastic: increase in price decrease in total revenue
  
80-120 = -40
(
*100= 50%


*100= 33%
Price
Quantity
e = 0
e = <1
Price
Relatively inelastic
Quantity
Unit elastic
e = 1
Price
Quantity
Relatively elastic
e = >1
Price
Quantity
Perfectly elastic
e =
Price
Quantity

= 5

= 100
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