Textbook Notes (363,019)
York University (12,353)
COMN 1000 (38)
Chapter 4

# Chapter 4 - Elasticity.docx

6 Pages
87 Views

School
York University
Department
Communication Studies
Course
COMN 1000
Professor
George Georgopoulos
Semester
Fall

Description
Chapter 4 - Elasticity  A large fall in price  A small increase in the quantity demanded  A small fall in price  A large increase in the quantity demanded A measure of the responsiveness of the quantity demanded to a price change. 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 buying plans remain the same. Price elasticity of Demand = Percentage change in quantity demanded Percentage change in price  Change in price is expressed as a percentage of the average price (average of initial price and new price)  Change in quantity demanded is expressed as a percentage of the average quantity demanded (average of initial and new quantity)  Initial price = \$20.50 Initial Quantity demanded = 9  Price falls to \$19.50 (decrease by \$1) Quantity demanded increases to 11  Average price = \$20 Average Quantity demanded = 10  Percentage change in average price is change in price/average price = 1/20 = 5%  Percentage change in average quantity demanded change in quantity demanded/average quantity demanded = 2/10 = 20%  Price Elasticity of Demand = % change quantity demanded / % change price = 20%/5% = 4 A Units-Free Measure Elasticity is a ratio of percentages, so a change the units of measurement of price or quantity leaves the elasticity value the same. Minus Sign and Elasticity Formula yields a negative value, because price and quantity move in opposite directions. But it is the magnitude, or absolute value that reveals how responsive the quantity change has been to a price change. Inelastic and Elastic Demand Demand can be inelastic, unit elastic, or elastic, and can range from zero to infinity. If the quantity demanded doesn’t change when the price changes, the price elasticity of demand is zero and the good as a perfectly inelastic demand. Demand curve is vertical, as price does not affect quantity demanded. If the percentage change in the quantity demanded equals the percentage change in price, … The price elasticity of demand equals 1 and the good has unit elastic demand. If the percentage change in the quantity demanded is smaller than the percentage change in price,  The price elasticity of demand is less than 1 and the good has inelastic demand. If the percentage change in the quantity demanded is greater than the percentage change in price,  The price elasticity of demand is greater than 1 and the good has elastic demand.  If the percentage change in the quantity demanded is infinitely large when the price barely changes, …  The price elasticity of demand is infinite and the good has a perfectly elastic demand.  At the mid-point of the demand curve, demand is unit elastic.  At prices above the mid-point of the demand curve, demand is elastic.  At prices below the mid-point of the demand curve, demand is inelastic. Total Revenue and Elasticity  The total revenue from the sale of good or service equals the price of the good multiplied by the quantity sold.  When the price changes, total revenue also changes.  But a rise in price doesn’t always increase total revenue.  If demand is elastic, a 1 percent price cut increases the quantity sold by more than 1 percent, and total revenue increases.  If demand is inelastic, a 1 percent price cut increases the quantity sold by less than 1 percent, and total revenues decreases.  If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1 percent, and total revenue remains unchanged.  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 price change (when all other influences on the quantity sold remain the same).  If a price cut increases total revenue, demand is elastic.  If a price cut decreases total revenue, demand is inelastic.  If a price cut leaves total rev
More Less

Related notes for COMN 1000

OR

Don't have an account?

Join OneClass

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

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.