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York University (12,350)
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ECON 1000 (397)
Chapter 4

# Chapter 4 - Elasticity.docx

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School
York University
Department
Economics
Course
ECON 1000
Professor
Ardeshir Noordeh
Semester
Fall

Description
ECON 1000 October 3, 2013 CHAPTER 4:  ELASTICITY Price Elasticity • Price elasticity of demand: is a unit-free measurement 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. • Calculating price elasticity of demand: o %CHG in quantity demanded / %CHG in price  > 1 - elastic  =1 - unit elastic (unitary)  < 1 - inelastic o We express the change in price as a percentage of the average price—the average of the initial and new price, and we express the change in the quantity demanded as a percentage of the average quantity demanded EXAMPLE Price of a pizza is \$20.50 and 9 demanded  falls to \$19.50 and increase to 11 demanded  Price falls \$1 but quantity demanded increases by 2 pizzas/hour  Average price is \$20 and average quantity demanded is 10 pizzas/hour %CHG in quantity demanded = %CHG quantity / %CHG avg. quantity = (2/10) x 100 = 20% %CHG in price = %CHG price / %CHG avg. quantity = (\$1/\$20) x 100 = 5% • 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 • Total revenue and elasticity ECON 1000 October 3, 2013 o Total revenue from the sale of good or service equals the price of the good multiplied by the quantity sold.  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. • Your expenditures and elasticity o If your demand is elastic, a 1 percent price cut increases the quantity you buy by more than 1 percent and your expenditure on the item increases. o If your demand is inelastic, a 1 percent price
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