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What effect does a change in price have on the quantity demanded?

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Presentation on theme: "What effect does a change in price have on the quantity demanded?"— Presentation transcript:

1 What effect does a change in price have on the quantity demanded?

2 Elasticity of demand is the response to price change for different goods

3 How do different goods respond to being dropped? An anology

4 GOOD RESPONSE DROP A SOCCER BALL ? ELASTIC

5 BUT, DROP A FORK LIFT ? NOT MUCH RESPONSE INELASTIC

6 If the response of quantity demanded to a price change is proportional Its called unit elastic

7 Suppose gas cost $3.00 a gallon But now its $3.50 (3/3.5=.857).5/{6.5/2} =.5/3.25 =.15 or 15% If you had previously bought 40 gallons a week, about how many would you purchase if gas is unit elastic?.857 X 30 = – = /{55.71/2} = 4.29/27.85 =.15

8 Qualities that affect Elasticity of Demand Substitutability Proportion of income spent on product Luxury or necessity? Habit-forming? Time

9 Elasticity coefficients ε d = percentage change in quantity demanded percentage change in price Hot tip !!! To solve for Percentage Change: The new less the old by the old plus the new, divided by two

10 MIDPOINT OR Arc METHOD Q ε d = (Q+Q1)/2 P (P+P1)/2

11 example Price X quantity = total revenue $10 X 10 = $100 $ 9 X 12 = $ ε d =(10+12)/2= 11 =.18 = 1.8 elastic 1 1 =.10 (10+9)/2=9.5 {2 X 9.5} = 20 = 1.8 {11 x 1} = 11

12 Quick quiz: What the coefficients mean ε d > 1 ε d < 1 ε d = 1 Elastic Unit Elastic Inelastic

13 Summarizing Price Elasticity of Demand Elasticity Coefficient Term Description Impact on TR of price increase Impact on TR of price decrease Greater than 1 ε d > 1 Elastic Quantity demanded changes by a larger percentage than does price Total revenue decreases Total revenue increases Equal to 1 ε d = 1 Unit Elastic Quantity demanded changes by the same percentage as does price Total revenue unchanged Proportion Total revenue unchanged proportion Less than 1 ε d < 1 Inelastic Quantity demanded changes by a smaller percentage than does price Total revenue increases Total revenue decreases


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