As the Price of X increases… QD decreases….. But by how much?

Why? What makes it different? 200% increase in price 33% increase in Price 66% decrease in Qd 40% decrease in Qd Why? What makes it different?

Ch. 5: Elasticity A measure of how much buyers and sellers respond to changes in market conditions: Changes in : Price; Income; Price of Related Goods

S + D discussion has been qualitative so far…. …now we begin quantitative How much does S + D change in response = A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants

Price Elasticity of Demand =measure of how much the quantity demanded of a good responds to a change in the price of that good = % change in Qd % change in P D for a good is ELASTIC if…. Qd responds more than P D for a good is INELASTIC if….Qd responds less than P

Ex: If P of ice cream rises 10% and it causes you to buy 20% less ice cream % change Qd 20% = 2 % change P 10% ………the PEd for ice cream = 2 Less 1 = inelastic 1 = unit elastic Greater 1 = elastic 0 = perfectly inelastic Infinite = perfectly elastic

Determinants of Elasticity Economic, social, psychological forces shape consumer behavior Necessities vs. Luxuries Availability of Close Substitutes Definition of the Market (broad or narrow) Time Horizon (long or short)

0 = perfectly inelastic infinite = perfectly elastic

Less than one = inelastic One = unit elastic Greater than one = elastic

Steeper the slope , ………. The more inelastic

Linear D curve Slope is constant What about Elasticity? Elasticity changes How/Why?

Negatives do not matter for PED Mid point method p. 96 Total Revenue (PxQ) Inelastic : P increase ; then TR ….. increases - why ? P decrease; then TR ….. Decreases – why? So the rule is…….

Elastic: P increases; TR….? TR decreases - why P decreases; TR …..? increases - why So the rule is……..

TR when D is Unit Elastic Elastic: as P falls, TR rises what about TR when it’s Unit Elastic? Inelastic: as P falls TR falls

TR when D is Unit Elastic What if it is Unit Elastic over a range…? As P falls, TR would not change