01:220:102 Chapter Notes - Chapter 6: Demand Curve, Midpoint Method, Normal Good

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Introduction to microeconomics 6. 1: defining and measuring elasticity. Price elasticity of demand - the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve. Law of demand - demand curves are downward sloping, so price and quantity demanded always move in opposite directions. Midpoint method - technique for calculating the percent change. In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values. Price elasticity of demand compares the percent change in quantity demanded with the percent change in price. The price elasticity of demand can be found by comparing the percentage change in quantity demanded to the percentage change in price. Introduction to microeconomics 6. 2: interpreting the price elasticity of demand. Demand is perfectly inelastic when the quantity demanded does not respond at all to changes in the price.

Related Questions

Most economists report the elasticity of demand as:

a. the absolute value of the actual number.

b. a negative number, since price and quantity demanded move in opposite directions.

c. a percentage, since both the numerator and denominator are percentages.

d. a dollar amount, since we are measuring the change in price.

jadegoat188

As we have learned, many economic topics have been obsolete for decades. Yet, some topics and concepts continue to stand the test of time and are therefore useful today. Price point elasticity is a hallmark subtopic of microeconomics that is also considered a serious sub-topical contender for the modern body of knowledge surrounding our study of a sustainable economy. The reason for the legitimacy is that it based upon the mathematical ratio of price and quantity demanded along the demand curve. This basic calculation is in actuality a simple ratio that is based upon the linear slope relationship of price and quantity demanded for a specific product or service. Results render quantitative decision support for price adjustments and their consequence. For every one percent increase in price, the price point elasticity tells you how much less quantity will be demanded as a percent. Conversely, for every one percentage decrease in price, price point elasticity tells you how much more quantity will be demanded, as a percent.

Results are percentage so further calculation is needed to determine if the price adjustment is justified by a loss or gain relative to leaving the price the same. For example, the price demand schedule below says that for every one percent change we will see a two percent negative change in quantity demanded. So if we change the price five percent, we will see a negative impact of ten percent less product sold. If our product sells for $40 and we increase it to $42 we will see a drop of 200 sold. If the scale of our schedule is in millions sold, we will see a decrease of 200 million sold. Do you think it is worth the trouble of changing the price? Why?
We may gain $4000 by increasing price but we will also may lose 200 sales and at the new price of 42 dollars so our estimated loss of $8400 will be far greater than the gain. Of course, these are estimates and real world pricing may be in pennies instead of dollars, especially in this price range and other factors must be considered such as substitutes, complements, changing trends, taste, obsolesce, incomes, and a series of demographic fluctuations that are representative of the population of customers. Nonetheless, isolating price and quantity is the first exercise when considering the demand for a product or service.