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Chapter 19 How
Elasticity of Demand Our Economics Learning Center has information for students, teachers, an professionals. |
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Macro and Microeconomics Quick Notes are now Free at the Economics Internet Library.
I. Please review supply and demand principles explained in Chapter 4.
II. Elasticity of demand measures the responsiveness of quantity demanded to
changes in price, income, and the price of
related goods.
III. Price elasticity of demand
F. A demand schedule has more than one elasticity of demand.
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Demand Schedule |
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| Price | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Quantity | 9 | 8 | 7 | 6 | 5 | 4 | 3 | 2 |
| Total Revenue | 18 | 24 | 28 | 30 | 30 | 28 | 24 | 18 |
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P goes from 4 to 5 and Q from 7 to 6. |
P goes from 5 to 6 and Q from 6 to 5. |
P goes from 6 to 7 and Q from 5 to 4. |
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G. Interpreting Elasticity of demand
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Relative Change in Quantity |
Terminology |
ED Parameters |
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None, will pay anything, numerator is zero. |
Perfectly Inelastic |
ED = 0 |
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Small |
Inelastic |
0 < ED < 1 |
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Q demanded and P change same percentage |
Unitary Elasticity |
ED = 1 |
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Large |
Elastic |
1 < ED < |
| Infinitely Large, price doesn't change, denominator is zero |
Perfectly Elastic |
ED is undefined, can't divide by zero. |
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View a table containing elasticity of demand approximations presented by the MACKINAC CENTER FOR PUBLIC POLICY. |
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H.
Elasticity
II from Samuel L. Baker, Ph.D. of the University
of South Carolina provides quantitative measuring elasticity practice.
IV. Graphing price elasticity of demand
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V. What determines elasticity of demand
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Product Characteristics |
Elastic Demand |
Inelastic Demand |
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Number of substitutes |
Many |
Few or none |
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% of purchaser's budget |
High |
Low |
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Type of good |
Luxury |
Necessity, Emergency |
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Time until purchase |
No hurry |
Required quickly |
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Examples |
Steak, Vacations |
Salt, Bread |
VI. Elasticity of demand and total revenue
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A. Moving from left to right on the bottom
graph indicates what happens to total revenue
as price is lowered and the quantity sold increases. B. At lower quantities (higher prices) demand is elastic. Quantity increases are relatively greater than price decreases and total revenue increases as more units are sold. C. This means a company facing an elastic demand can increase revenue by decreasing price. An important question to be answered concerns what happens to costs when a lower price causes more units to be sold. D. When demand becomes inelastic, quantity increases are now relatively less than price decreases, and total revenue falls. E. This means a company could increase total revenue by increasing price and selling fewer units. This could mean a very high profit. Important questions to be answered concern how competitors react to these higher prices, can the company produce lower quantities at reasonably low costs, exactly how much profit will the company make, and how will the government react to these higher profits. F. When demand is elastic, price and total revenue move in the opposite direction. G. When demand is inelastic, price and total revenue move in the same direction.
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VII. Income elasticity of demand is the % change in quantity demanded
divided by the % change in income.VIII. Cross elasticity of demand is the % change in quantity demanded
divided by the % change in the price of a
substitute or complement.
A. Cross elasticity is positive
for goods that are substitutes
IX. Virtual Economy from Buz\ed has an elasticity calculator.
X Price elasticity of supply is the % change in quantity supplied
divided by the % change in price.
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