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Published byRoy Reeds Modified over 3 years ago

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

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

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**How do different goods respond to being dropped?**

An anology

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DROP A SOCCER BALL ? GOOD RESPONSE ELASTIC

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BUT, DROP A FORK LIFT ? NOT MUCH RESPONSE INELASTIC

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**If the response of quantity demanded to a price change is proportional**

It’s called unit elastic

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**Suppose gas cost $3.00 a gallon**

But now it’s $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 = 25.71 30 – = 4.29 4.29/{55.71/2} = 4.29/27.85 =.15

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**Qualities that affect Elasticity of Demand**

Substitutability Proportion of income spent on product Luxury or necessity? Habit-forming? Time

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**Elasticity coefficients**

εd = 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”

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MIDPOINT OR Arc METHOD ∆ Q εd = (Q+Q1)/2 ∆P (P+P1)/2

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**example Price X quantity = total revenue $10 X 10 = $100**

εd = (10+12)/2 = = = elastic = (10+9)/2 = 9.5 {2 X 9.5} = = 1.8 {11 x 1} = 11

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**Quick quiz: What the coefficients mean**

εd > 1 εd < 1 εd = 1 Elastic Inelastic Unit Elastic

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**Summarizing Price Elasticity of Demand**

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

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What you will learn... Total revenue and profit Elasticity and change in total revenue Take this challenge.

What you will learn... Total revenue and profit Elasticity and change in total revenue Take this challenge.

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