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ECO 1104 Lecture Notes - Lecture 7: Demand Curve, Midpoint Method

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whitemanatee506
5 Oct 2018
School
University of Ottawa
Department
Economics
Course
ECO 1104
Professor
Cristina Blanco-Perez

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ECO 1104 Lecture Notes - Lecture 7: Demand Curve, Midpoint Method

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ECO 1104 LECTURE 7 - ELASTICITY
Elasticity is a measure of the responsiveness to a change in a market condition.The concept
applies to supply and demand.It measures the response to a change in:
- The price of the good.
- The price of a related good. – Income.
It helps to answer the question “how big” is the response to a price change
Price elasticity of demand
The price elasticity of demand measures the magnitude of change in the quantity demanded from
a change in its price.
In other words, it estimates price sensitivity:
– “More elastic”: small changes in price, large change in
quantity demanded. Consumers very sensitive to price
– “More inelastic”: changes in price do not change much the quantity demanded.
Consumers, not very sensitive to price
Calculating price elasticity
• Price elasticity is the percentage change in the quantity of a good that is demanded in response to a
given percentage change in price:
Mid point method
The midpoint method calculates the elasticity at the midpoint of any two points. The formula is:
• The midpoint elasticity is the difference of any two numbers divided by their average.
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Document Summary

Elasticity is a measure of the responsiveness to a change in a market condition. the concept applies to supply and demand. it measures the response to a change in: It helps to answer the question how big is the response to a price change. The price elasticity of demand measures the magnitude of change in the quantity demanded from a change in its price. More elastic : small changes in price, large change in quantity demanded. More inelastic : changes in price do not change much the quantity demanded. Calculating price elasticity: price elasticity is the percentage change in the quantity of a good that is demanded in response to a given percentage change in price: The midpoint method calculates the elasticity at the midpoint of any two points. The formula is: the midpoint elasticity is the difference of any two numbers divided by their average. Consumers are more sensitive to price changes for some goods and services than for others.

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Related Questions

Discussion #1

The law of demand states that a fall in the price of a good raises the quantity demanded, and the increase in price leads to a decrease in quantity demanded. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price, and the percentage change in quantity demanded is greater than the percentage change in price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price, which indicates that the percentage in price is greater than the percentage in quantity demanded.

However, the extent of responsiveness of quantity demanded to a change in price depends on the nature of a particular good or service in the market. The price elasticity of demand partly depends on the availability of close substitutes. When a large number of substitutes are available, consumers respond to a higher price of a good by buying more of the substitute goods and less of the relatively more expensive good. In addition, goods or services that are considered necessities tend to have less elastic (more inelastic) demand, whereas goods or services that are considered luxuries have more elastic (less inelastic) demands.

  • Explain why the demand for the good or service provided by the organization you work for is elastic or inelastic. How does this influence pricing decisions?
  • Provide examples on how the availability of close substitutes affects price elasticity of demand.
  • Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

Please answer ALL bulletins and place the answers under the correct bulletin.

interval (or arc) elasticity

cross-price elasticity

price elasticity of demand

elastic demand

income elasticity

inelastic demand

inframarginal units

marginal revenue

point elasticity

price effect

quantity effect

total revenue

unitary elastic demand

1. __________________ A measure of consumers’ sensitivity or responsiveness to changes in the price of a good or service.

2. ___________________ When the percentage change in price (in absolute value) is more than the percentage change in quantity demanded (in absolute value).

3. ___________________ When the percentage change in quantity demanded (in absolute value) is more than the percentage change in price (in absolute value).

4. ___________________ When the percentage change in quantity demanded (in absolute value) is just equal to the percentage change in price (in absolute value).

5. ___________________ Total amount paid to a producer for a good or service P * Q.

6. ___________________ The effect on total revenue of a change in price, holding quantity constant.

7. ___________________ The effect on total revenue of a change in quantity, holding price constant.

8. ___________________ An elasticity calculated over an interval of a demand curve or demand schedule.

9. ___________________ Elasticity at a specific price or point on a demand curve.

10. ___________________ A measure of how responsive quantity demanded is to a change in income, all other things constant.

11. ___________________ A measure showing how responsive the quantity demanded of one good is to changes in the price of another good, other factors constant.

12. ___________________ The additional revenue received by producing and selling one more unit of output.

13. ___________________ Units of output that could have been sold at a higher price had the firm not lowered its price to sell additional (marginal) units.

27. Which of the following statements is correct? a. The greater the price elasticity of demand, the more likely the product is a necessity. b. The greater the price elasticity of demand, the smaller the responsiveness of quanti demanded to price. The greater the price elasticity of demand, the greater the percentage change in price over the percentage change in quantity demanded. d. The greater the price elasticity of demand, the greater the responsiveness of quantity demanded to price.