Microeconomics Introduction

 Responsiveness or sensitivity of consumers to a price change

 Modest price changes cause very large changes in the quantity demanded  Ex. Restaurant prices, vacations, soda

 Substantial price changes cause only small changes in the amount purchased  Consumers pay very little attention to the cost  Ex- toothpaste,  Medicine, tobacco

 P- the proportion of income spent on the good  A- availability of close substitutes (the more subs. The more elastic)  I- the importance of a good (luxury v necessity)  D- the ability to delay the purchase (the more time, the more elastic)

Percentage Change in Quantity Demanded of Product X Percentage Change in Price of Product X E d = O 18.1

Change in Quantity Demanded of X Original Price of X E d = Change in Price of X Original Quantity Demanded of X ÷ W 18.1

E d= Change in Quantity Sum of Quantities/2 ÷ Change in Price Sum of Prices/2 W 18.1

 A price change from $4-5 is an increase of 25% = ((5-4)/4)  A price change from $5-4 is a decrease of %20 = ((5-4)/5)  Quantity demanded  From 10 to 20 is an increase of 100%  From 20 to 10 is a decrease of 50%  This causes the “up versus down problem”

 Price and quantity demanded are inversely related which will mean the price-elasticity coefficient will be negative  Economists use absolute value to avoid confusion

 Complete the following problem:  Price change from $4-5  Demand change from  Calculate the E d

 E d= (Chg quant/sum of quant/2) / (Chg price/sum of price/2)  ((20-10)/(20+10/2)) / ((5-4)/(5+4)/2)  = (10/(30/2)) / (1/(9/2))  = (10/15) / (1/4.5)  =.67/.22  = 3

 Demand is elastic if a specific percentage change in price results in a larger percentage change in the quantity demanded  Ex- 2% decline in price of flowers results in a 4% increase in quantity demanded  =.04/.02 = 2  *** E d > 1

 Demand is inelastic if a specific change in price leads to a smaller percentage change in quantity demanded  Ex- 2% decline in the price of coffee leads to a 1% increase in quantity demanded  E d =.01/.02 =.5  E d < 1

 A percentage change in price and the resulting percentage change in quantity demanded are the same  Ex- 2% drop in the price of chocolate causes a 2% increase in quantity demanded E d =.02/.02 E d = 1

 Extreme situation where a price change results in no change at all in the quantity demanded  Price elasticity coefficient is zero because there is no response to change in price  Ex- diabetic needing insulin or a heroin addict needing drugs

 Small price reduction causes buyers to increase their purchases from zero to all they can obtain  Elasticity coefficient is infinity

 Total Revenue is the total amount a seller receives from the sale of a product during a particular time period  TR = P x Q  P = Product Price and  Q = quantity sold

 Note what happens to total revenue when prices change?  If TR changes in opposite direction of price, demand is elastic  If TR changes in the same direction as price, demand is inelastic  If TR doesn’t change when price changes, demand is unit-elastic