ECN 101 Chapter Notes - Chapter 6: Root Mean Square, Independent Goods

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28 May 2018

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Chapter 6

ECN 101

Sept 28th

Price of Elasticity of Demand:

How much does quantity demanded change in response to a change in price?

Elasticity gives us a measure of responsiveness of Quantity to a change in Price, or… how does

Quantity “stretch” when the price changes .

The Price elasticity of Demand Coefﬁcient:

-who Q(demanded) responds strongly to a change in P, demand is elastic

-when quantity demanded responds weakly to a change in P, demand is inelastic

E(demanded) = percentage change in quantity demanded of product X

percentage change in price of product X

E(demanded) = %change in Qd for product x / % change in Qp for product x

Delta - change in price or in quantity

Calculating a percentage -

%Q(demanded) = change in quantity demanded of product X x 100%

original quantity of product X

If Qd increased from 4 to 5 units the percentage change would be:

the percentage change in quality demanded is calculated as follows -

%Qd=Qd/Qo=1/4 x 100=25%

To calculate the percentage in price between two points, we divide the change in price (delta P)

by the original price (P original):

%deltaP = change in price of product X x100%

original price of product X

For example, if the price dropped from $5 to $4, the percentage change in price is calculated as

follows:

%deltaP= deltaP = 1/5 x 100% = 20%

original p

Midpoint formula (for calculating elasticity; it averages the two prices and the two quantities as

the reference points for computing the percentages.

E(demanded) = change in quantity / change in price

sum of quantities/2 sun of prices/2

The Price Elasticity Coefﬁcient:

- Price elasticity of Demand :

Use % - eliminates problems of choice of units.

Unit free measure : it will not matter

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Elasticity gives us a measure of responsiveness of quantity to a change in price, or how does. Who q(demanded) responds strongly to a change in p, demand is elastic. When quantity demanded responds weakly to a change in p, demand is inelastic. E(demanded) = percentage change in quantity demanded of product x percentage change in price of product x. E(demanded) = %change in qd for product x / % change in qp for product x. Delta - change in price or in quantity. %q(demanded) = change in quantity demanded of product x x 100% original quantity of product x. If qd increased from 4 to 5 units the percentage change would be: the percentage change in quality demanded is calculated as follows - To calculate the percentage in price between two points, we divide the change in price (delta p) by the original price (p original): %deltap = change in price of product x x100% original price of product x.

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 consumersâ 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.

coffeehornet269

1. In each case below, what is the value of the price elasticity of demand? Is demand perfectly inelastic, inelastic, unit elastic, elastic or perfectly elastic?

a. Price falls by 10%, quantity demanded rises by 8%

b. Price rises by 3%, quantity demanded falls by 3%

c. Price rises by 1%, quantity demanded falls by 5%

d. Price rises by 5%, quantity demanded collapses to zero

e. Price falls by 2%, quantity demanded does not change

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ECN 101 Chapter Notes - Chapter 6: Root Mean Square, Independent Goods

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