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Economics (213)
01:220:102 (140)
Chapter 4

Chapter 4 Elasticity Outline Notes

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Department
Economics
Course
01:220:102
Professor
Erin Fairweather
Semester
Fall

Description
PriceElasticityof Demand Sunday,February17, 2013 11:10PM • PriceElasticity ofDemand- units-free measure of the responsiveness of the quantity demanded of a good to change in its price when all other influences on buying plans remain the same △Q/%△P • Calculat△Q= △Q/Qe Elastx 100of Demand ○ Pri△P= △P/Picityox 100and = % ○ % ave ○ % ○ Percentages andProportions  Elasticityis the ratioof two percentage changes ○ Units-Free Measure  Units-free because the percentage change in eachvariable is independent of the units in which the variable is measured ○ Minus Sign and Elasticity  Positive price causes a negative demand, so price elasticityof demand is a negative number  Absolute value of the price elasticityof demand tells us how responsive the quantity demanded is • Inelastic andElastic Demand ○ Perfectly Inelastic Demand- if quantitydemanded remains constant when the price changes, then the price elasticityof demand is zero  Important product that will be bought no matter the price (i.e. insulin) ○ Unit Elastic Demand- if the percentage change inthe quantity demanded equals the percentage change in the price, then the price elasticityequals 1 ○ Inelastic Demand- occurs when the price elasticityof demand is between zero and 1 ○ Perfectly Elastic Demand- if quantitydemanded changes by aninfinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity  i.e. two vending machines next to eachother set atdifferent prices; lowestprice makes the money ○ Elastic Demand- occurs when price elasticityof demand is greaterthan 1 • Total Revenue and Elasticity ○ Total Revenue- equals the price of the good multiplied by the quantity sold ○ Change intotal revenue depends on the elasticityof demand inthe following way:  If demand is elastic, a 1%price cut increases the quantity sold by more than 1% and total revenue increase  If demand is inelastic, a 1%price cut increases the quantity soldby less than1% and total revenue decreases  If demand is unit elastic, a 1%price cut increases the quantity soldby 1% and total revenue does not change ○ Total Revenue Test- method of estimating the price elasticityof demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity soldremain the same  If a price cut increases total revenue, demand is elastic  If a price cut decreases total revenue, demand is inelastic  If a p
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