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ECON 1000 Chapter Notes - Chapter 4: Inferior Good, Normal Good, Demand Curve

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York University
Department
Economics
Course
ECON 1000
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All

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Document Summary

The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in the price when all other influences on buying plans remain the same. We calculate the price elasticity of demand by using the formula: To calculate price elasticity of demand, we express the change in price as a percentage of the average price and the change in the quantity demanded as a percentage of average quantity. By using the average price and average quantity, we calculate the elasticity at a point on the demand curve midway between the original point and the new point. We use average price and average quantity because it gives the most precise measurement of elasticity ad the midpoint between the original price and the new price. Elasticity is the ratio of two percentage changes and is a proportionate change multiplied by 100.

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Related Questions

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.

Calculating the price elasticity of demand - A step-by-step guide

Suppose that during the past year, the price of a laptop computer fell from $2,950 to $2,450. During the same time period, consumer sales increased from 430,000 to 619,000 laptops.

1. Calculate the elasticity of demand between these two price quantity combinations by using the following steps. After each step, complete the relevant part of the table with the appropriate answers. (Note: For decreases in price or quantity, enter values in the Change column with a minus sign.)

  Original New Average Change Percentage Change
Quantity ? ? ? ?

a. 36.03%

b. 18.02%

c. 277.51%
Price $ $ $ $

a. -18.52%

b.-540%

c. -9.26%

Step 1: Fill in the appropriate values for original quantity, new quantity, original price, and new price.

Step 2: Calculate the average quantity by adding the original quantity and the new quantity, and then dividing by two. Do the same for the average price.

Step 3: Calculate the change in quantity by subtracting the original quantity from the new quantity. Do the same for the price change.

Step 4: Calculate the percentage change in quantity demanded by dividing the change in quantity by the average quantity. Do the same to calculate the percentage change in price.

Step 5: Calculate the price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price, ignoring the negative sign.

2. Using the midpoint method, the elasticity of demand for laptops is about

a. 0.051

b. 0.97

c. 1.95

d. 3.89

 

Suppose that during the past year, the price of a laptop computer fell from $2,950 to $2,450. During the same time period, consumer sales increased from 430,000 to 619,000 laptops. Calculate the elasticity of demand between these two price–quantity combinations by using the following steps. After each step, complete the relevant part of the table with the appropriate answers. (Note: For decreases in price or quantity, enter values in the Change column with a minus sign.) Original New Average Change Percentage Change Quantity 36.03% Price -18.52% Step 1: Fill in the appropriate values for original quantity, new quantity, original price, and new price. Step 2: Calculate the average quantity by adding the original quantity and the new quantity, and then dividing by two. Do the same for the average price. Step 3: Calculate the change in quantity by subtracting the original quantity from the new quantity. Do the same for the change in price. Step 4: Calculate the percentage change in quantity demanded by dividing the change in quantity by the average quantity. Do the same to calculate the percentage change in price. Step 5: Calculate the price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price, ignoring the negative sign. Using the midpoint method, the elasticity of demand for laptops is about .