ECON 201 Chapter Notes - Chapter 5: Midpoint Method, Demand Curve

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8 Feb 2017
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Chapter 5: Elasticity and Its Application
5.1 The Elasticity of Demand
The Price Elasticity of Demand and Its Determinants
Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to
a change in one of its determinants
price elasticity of demand: a measure of how much the quantity demanded of a good
responds to a change in the price of that good, computed as the percentage change in
quantity demanded divided by the percentage change in price
Demand is said to be inelastic if the quantity demanded responds only slightly to
changes in the price.
Availability of Close Substitutes: higher availability means higher elasticity
Necessities vs. Luxuries: luxuries more elastic
Definition of the Market: narrowly defined means more elastic
Time Horizon: more elastic over longer time horizon
Computing the Price Elasticity of Demand
Price elasticity of demand = % change in quantity demanded/ % change in price
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities
the midpoint method computes a percentage change by dividing the change by the
midpoint (or average) of the initial and final levels
price elasticity of demand=(Q2-Q1)/[(Q2+Q1)/2](P2-P1)/[(P2+P1)/2]
The Variety of Demand Curves
Demand is considered inelastic when the elasticity is less than 1, which means the
quantity moves proportionately less than the price
if the elasticity is exactly 1, the percentage change in quantity equals the percentage
change in price, and demand is said to have unit elasticity.
The flatter the demand curve that passes through a given point, the greater the price
elasticity of demand. The steeper the demand curve that passes through a given point,
the smaller the price elasticity of demand.
Perfectly inelastic: 0 elasticity
Total Revenue and the Price Elasticity of Demand
total revenue: the amount paid by buyers and received by sellers of a good, computed
as the price of the good times the quantity sold
When demand is inelastic (a price elasticity less than 1), price and total revenue move in
the same direction: If the price increases, total revenue also increases.
When demand is elastic (a price elasticity greater than 1), price and total revenue move
in opposite directions: If the price increases, total revenue decreases.
If demand is unit elastic (a price elasticity exactly equal to 1), total revenue remains
constant when the price changes.
Elasticity and Total Revenue along a Linear Demand Curve
the slope of a linear demand curve is constant, the elasticity is not.
This is true because the slope is the ratio of changes in the two variables, whereas the
elasticity is the ratio of percentage changes in the two variables
At points with a low price and high quantity, the demand curve is inelastic. At points with
a high price and low quantity, the demand curve is elastic.
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