EC 201 Chapter 6: EC 201- Chapter 6

66 views2 pages

emeraldminnow228

7 Jun 2018

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Chapter 6: Elasticity

6.1 Price Elasticity of Demand

Price elasticity of demand: measures responsiveness of consumers to a price change

● Formula: ℎ

ℎ

● Midpoint formula: averages the two prices and the two quantities as the reference point for

computing the percentages

● Elastic Demand

○ Demand is elastic if a specific percentage in price results in a larger percentage change in

quantity demanded

○ Will be greater than 1

● Inelastic Demand

○ If a specific percentage change in price produces a smaller percentage, change in

quantity demanded, demand is inelastic

○ Will be less than 1

● Unit Elasticity

○ Occurs where a percentage change in price and the resulting percentage change in

quantity demanded are the same

● Perfectly inelastic

○

○ Price change results in no change whatsoever in the quantity demanded

○ Price-elasticity coefficient is zero

● Perfectly elastic

○

○ Small price reduction causes buyers to increase their purchases from zero to all they can

obtain, the elasticity coefficient is infinite

6.2 The Total-Revenue Test

Total revenue is the total amount the seller receives from the sale of a product in a particular time period

● Formula: TR = P x Q

Total-revenue test: used to determine elasticity of demand

● Demand is elastic if total revenue moves in the opposite direction from a price change

● Demand is inelastic when it moves in the same direction as a price change

● It is unitary elasticity when it does not change when price changes

find more resources at oneclass.com

Unlock document

This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.

Already have an account? Log in

Document Summary

Price elasticity of demand: measures responsiveness of consumers to a price change. Formula: (cid:3031)=(cid:3043)(cid:3032)(cid:3045)(cid:3030)(cid:3032)(cid:3041)(cid:3047)(cid:3034)(cid:3032) (cid:3030) (cid:3041)(cid:3034)(cid:3032) (cid:3041) (cid:3044)(cid:3048)(cid:3041)(cid:3047)(cid:3047) (cid:3031)(cid:3032)(cid:3040)(cid:3041)(cid:3031)(cid:3032)(cid:3031) (cid:3033)(cid:3042)(cid:3045) (cid:3043)(cid:3045)(cid:3042)(cid:3031)(cid:3048)(cid:3030)(cid:3047) (cid:3043)(cid:3032)(cid:3045)(cid:3030)(cid:3032)(cid:3041)(cid:3047)(cid:3034)(cid:3032) (cid:3030) (cid:3041)(cid:3034)(cid:3032) (cid:3041) (cid:3043)(cid:3045)(cid:3030)(cid:3032) (cid:3042)(cid:3033) (cid:3043)(cid:3045)(cid:3042)(cid:3031)(cid:3048)(cid:3030)(cid:3047) Midpoint formula: averages the two prices and the two quantities as the reference point for computing the percentages. Demand is elastic if a specific percentage in price results in a larger percentage change in quantity demanded. If a specific percentage change in price produces a smaller percentage, change in quantity demanded, demand is inelastic. Occurs where a percentage change in price and the resulting percentage change in quantity demanded are the same. Price change results in no change whatsoever in the quantity demanded. Small price reduction causes buyers to increase their purchases from zero to all they can obtain, the elasticity coefficient is infinite. Total revenue is the total amount the seller receives from the sale of a product in a particular time period. Total-revenue test: used to determine elasticity of demand.

Related Questions

If the percentage change in the quantity demanded of a good is less than the percentage change in price, the price elasticity of demand is:

A) Elastic

B) Inelastic

C) Perfectly inelastic

D) Unitary elastic

byzantiummole828

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.

1. The concept of price elasticity of demand measures:

a. the slope of the demand curve.

b. the number of buyers in a market.

c. the extent to which the demand curve shifts as the result of a price decline.

d. the sensitiveness of quantities demanded to price changes.

2. When the percentage change in price is less than the resulting percentage change in quantity demanded:

a. demand is elastic.

b. demand is inelastic.

c. demand is unit elastic.

d. none of the above.

3. The elasticity of demand:

a. will be the same at each price-quantity combination on a stable demand curve.

b. tends to be elastic in high-price ranges and inelastic in low-price ranges.

c. tends to be inelastic in high-price ranges and elastic in low-price ranges.

d. is infinitely large for a perfectly inelastic demand curve.

4. Suppose that as the price of Y falls from $2.00 to $1.80 the quantity of Y demanded increases from 110 to 121. It can be concluded that the price elasticity of demand is: _______.

5. Total revenue rises as the price of a good increases if price elasticity of demand is:

a. unitary elastic

b. perfectly inelastic.

6. The demand for such products as salt, bread, and electricity tend to be:

a. relatively price elastic.

b. relatively price inelastic.

c. of unit price elasticity.

d. perfectly price elastic.

coffeeelephant81

EC 201 Chapter 6: EC 201- Chapter 6

Document Summary

Get access

Related textbook solutions

Calculus

Single Variable Calculus: Early Transcendentals

CALCULUS:EARLY TRANSCENDENTALS

Related Documents

EC 201 Lecture Notes - Lecture 9: Midpoint Method

Related Questions