Textbook Notes (368,070)
Canada (161,617)
Economics (708)
Chapter 4

Chapter 4 Notes.docx

5 Pages
88 Views
Unlock Document

Department
Economics
Course
Economics 1021A/B
Professor
Jeannie Gillmore
Semester
Summer

Description
Chapter 4 Notes 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, ceteris parabus | | | |  in this calculation, the average price and average quantity are used  when the price of a good rises, the quantity demanded decreases o because a positive change in price brings a negative change in the quantity demanded, the price elasticity of demand is a negative number o we take the absolute value of this Elastic and Inelastic Demand  if the quantity demanded remains constant when the price changes, then the price elasticity of demand is zero, and the good is said to have a perfectly inelastic demand o e/x insulin, people will buy the same amount regardless of price  if the percentage change in the quantity demanded equals the percentage change in the price, then the price elasticity equals 1, and the good is said to have a unit elastic demand  if the price elasticity of demand of a good is between zero and 1, it is said to have an inelastic demand  if the quantity demanded changes by an infinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity and the good is said to have a perfectly elastic demand  if price elasticity of demand is greater than 1, it is said to have an elastic demand o e/x cars, furniture Total Revenue and Elasticity  the total revenue from the sale of a good equals the price of the good multiplied by the quantity sold  the change in total revenue depends on the elasticity of demand in the following ways: o if demand is elastic, a 1% price cut increases the quantity sold by more than 1% and total revenue increases o if demand is inelastic, 1% price cut increases the quantity sold by less than 1% and total revenue decreases o if demand is unit elastic, a 1% price cut increases the quantity sold by 1% and total revenue does not change  the total revenue test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in price, ceteris parabus o if a price cut increases total revenue, demand is elastic o if a price cut decreases total revenue, demand is inelastic o if a price cut leaves total revenue unchanged, demand is unit elastic  personal expenditure o when a price changes, the change in your expenditure on the good depends on one’s own elasticity of demand  if YOUR demand is elastic, a 1% price cut increases the quantity you buy by more than 1%, personal expenditure increases  if YOUR demand is inelastic, a 1% price cut increases the quantity you buy by less than 1%, personal expenditure decreases  if YOUR demand is unit elastic, a 1% price cut increases the quantity you buy by 1% and your expenditure on the item does not change Factors Influencing Elasticity of Demand  closeness of substitutes o the closer the substitutes for a good/service, the more elastic is the demand for it  e/x few substitutes for gasoline, so demand for oil is inelastic o a necessity has poor substitutes, meaning that they generally have inelastic demand o a luxury usually has many substitutes, meaning that they generally have an elastic demand  proportion of income spend on the good o the greater the proportion of income spent on a good, the more elastic (or less inelastic) is the demand for it  time elapsed since price change o the longer the time that has elapsed since a price change, the more elastic is demand Cross Elasticity of Demand  the cross elasticity of
More Less

Related notes for Economics 1021A/B

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit