BUSAD 120 Chapter 1: Busad 120 - Elasticity of Demand
Document Summary
Total revenue and the price elasticity of demand. If demand is inelastic price an increase in price will result in a less than proportionate decrease in quantity, meaning that total revenue will increase. If demand is elastic then an increase in price (p) will result in a proportionally larger decrease in quantity (q) demanded meaning that tr will decrease. If demand has unit elasticity then a change in price is proportionate to a change in q and tr is unaffected. Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers" income. Income elasticity of demand = % change in quantity demanded / % change in income. Normal goods have positive income elasticity (greater than 0) Inferior goods have negative income elasticity (less than 0) Goods consumers regard as necessities tend to be income inelastic, i. e. low positive income elasticity (less than 1) Food, fuel, clothing, utilities and medical services.
