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ECON 1000 Cha. 4 Notes.docx

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ECON 1000
Sadia Mariam Malik

ECON Cha. 4 Jot Notes Price Elasticity of Demand - 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 - Elasticity of demand = % change in quantity demanded/ % change in price - % change in quantity demanded = change/average quantity (ex. 9 pizzas -> 11 pizzas, 2/10) - % change in price = change/average price - Elasticity is a units-free measure because the percentage change in each variable is independent of the units in which the variable is measured - The price elasticity of demand is a negative number because a positive change in price beings a negative change in quantity demanded - If % change in quantity demanded = % change in price then price elasticity equals 1 (unit elastic demand) - Inelastic demands are between 0 and 1 (change in quantity < change in price) - Elastic demands are higher than 1 (change in quantity > change in price) - Elasticity does not = slope. (elasticity can be different along the lines of a slope) Total Revenue and Elasticity - If demand is elastic, a 1% price cut increases the quantity sold by more than 1% and totally revenue increases - If demand is inelastic, a 1% price cut increases the quantity sold by less than 1% and total revenue decreases - If demand is unit elastic, a 1% price cut increases the quantity sold by 1% and total revenue does not change - At unit elasticity, total revenue is at a maximum - Total revenue test – a method of estimating the price of elasticity of demand by observing the change in total revenue that results from a change in the price, when all other factors remain the same Your Expenditure and Your Elasticity - If you spend more on an item when its price falls, your demand for the item is elastic - If you spend the same amount, your demand is unit elastic - If you spend less, your demand is inelastic Factors that influence the Elasticity of Demand - The closeness of substitutes - The proportion of income spent on the good - The time elapsed since the price change (as time increase, elasticity increases as well) Cross Elasticity of Demand - Cross elasticity of demand – a measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, all other things remain the same - Cross elasticity of demand = % change in quantity demanded/% change in price of a substitute or complement - The cross elasticity is positive (a rise in price of a substitute cause an increase for quantity
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