ECON 101 Study Guide - Midterm Guide: Normal Good, Inferior Good, Midpoint Method
Econ 101 Chapter 6 Reading Notes
Defining and Measuring Elasticity:
Price Elasticity of Demand: ratio of the percent change in quantity demanded to the percent
change in price as we move along the demand curve
To calculate the price elasticity of demand, we first calculate the percent change in the
quantity demanded and the corresponding percent change in the price
Percent change in quantity demanded: change in quantity demanded divided by initial
quantity demanded; multiply this by 100
Percent change in price is change in price divided by initial price; multiply this by 100
If percent change in quantity demanded is negative, we drop this negative sign because
the price elasticity of demand is a negative number always
When economists discuss price elasticity of demand, they drop the minus sign and report
the absolute value of the price elasticity of demand
The larger the price elasticity of demand, the more responsive the quantity demanded is
to the price; when the price elasticity of demand is large- when consumers change their
quantity demanded by a large percentage compared to the % change in the price-
economists say that demand is highly elastic
Inelastic demand is when quantity demanded will fall by a small amount when price rises
Midpoint method: a 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
Important point is that we get the same result when we go up or down the demand curve
when using the midpoint method
Perfectly Inelastic Demand: case of a zero price elasticity of demand; vertical line on graph;
regardless of price, a certain amount of a good is always demanded; quantity demanded is
unaffected by price
Perfectly Elastic: when even a tiny rise in the price will cause the quantity demanded to drop to
zero or even a tiny fall in the price will cause the quantity demanded to get extremely large:
demand curve is a horizontal line; price elasticity of demand is infinite
Demand is elastic if the price elasticity of demand is greater than 1, inelastic if the price
elasticity of demand is less than 1, and unit elastic if the price elasticity of demand is 1
Unit elastic is when price elasticity of demand is exactly 1
Elastic: changes in price cause big changes in demand; inelastic: not so much
Classification of elasticity predicts how changes in the price of a good will affect the total
revenue earned by producers from the sale of that good
Total revenue: defined as the total value of sales of a good or service, equal to the price
multiplied by the quantity sold
Price effect: after a price increase, each unit sold sells at a higher price, which tends to raise
revenue; quantity effect: after a price increase, fewer units are sold, which tends to lower revenue
If the strengths of both effects are equal, total revenue is unchanged by the price increase
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Document Summary
Price elasticity of demand: ratio of the percent change in quantity demanded to the percent change in price as we move along the demand curve. To calculate the price elasticity of demand, we first calculate the percent change in the quantity demanded and the corresponding percent change in the price. Percent change in quantity demanded: change in quantity demanded divided by initial quantity demanded; multiply this by 100. Percent change in price is change in price divided by initial price; multiply this by 100. If percent change in quantity demanded is negative, we drop this negative sign because the price elasticity of demand is a negative number always. When economists discuss price elasticity of demand, they drop the minus sign and report the absolute value of the price elasticity of demand. Inelastic demand is when quantity demanded will fall by a small amount when price rises.
