ECO101H1 Chapter Notes - Chapter 6: Midpoint Method, Demand Curve, Normal Good

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Price elasticity of demand (or own price elasticity of demand) relates to the change in quantity demanded of a product to a change in its own price. Price elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in price as we move along the demand curve. o o. The law of demand says that demand curves are downward sloping. o. This means that the price elasticity of demand, in mathematical terms, is a negative value. Economists report the absolute value by dropping the minus sign. The larger the price elasticity of demand, the more responsive the quantity demanded is to price. Quantity demanded will fall by a relatively large amount when price rises: demand is highly elastic. The smaller the price elasticity of demand, the less responsive the quantity demanded is to price. Quantity demanded will fall by a relatively small amount when price rises: demand is highly inelastic.

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1. __________________ A measure of consumersâ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

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1. In each case below, what is the value of the price elasticity of demand? Is demand perfectly inelastic, inelastic, unit elastic, elastic or perfectly elastic?

a. Price falls by 10%, quantity demanded rises by 8%

b. Price rises by 3%, quantity demanded falls by 3%

c. Price rises by 1%, quantity demanded falls by 5%

d. Price rises by 5%, quantity demanded collapses to zero

e. Price falls by 2%, quantity demanded does not change