Chapter 6 - Extensions of Demand and Supply Analysis

Chapter 6 - Extensions of Demand and Supply Analysis -...

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Economics 212 Principles of Microeconomics
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Chapter 6 Extensions of Demand and Supply Analysis
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I. Price Elasticity of Demand A. The Law of Demand tells us that consumers will respond to a price decline by buying more of a product (ceteris paribus), but it does not tell by how much. B. The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand
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1. elastic demand - consumers are relatively responsive to price changes (restaurant meals) 2. inelastic demand - consumers are relatively unresponsive to price changes (cigarettes, milk)
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3. For both elastic and inelastic demand 1. Consumers behave according to the Law of Demand 2. Describe the degree of responsiveness to price changes
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A. Price elasticity of demand formula 1. E d = % change in quantity % change in price or E d = (change in Q/Q) (change in P/P)
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1. It is important to use the percentage (%) rather than absolute changes a. Absolute changes depend on the choice of units. (i.e. a change in Price from $2 to $1 could be stated as a change of 1 unit if we use dollars or 100 units if expressed in cents)
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b. Percent also makes it possible to compare E d for different products. (i.e. $10,000 car whose price rises by $1, and for a $1 candy bar whose price rises by $1.)
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2. Because of the inverse relationship between price and quantity demanded, the actual E d will be a negative value. So the absolute value must be used.
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3. If: a. E d > 1, then demand is elastic (price responsive) - a % change in price results in a larger % change in quantity demanded
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b. E d < 1, then demand is inelastic (price unresponsive) -a % change in price is accompanied by a smaller % change in quantity demanded
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c. E d = 1, then demand is unitary elastic -a % change in price and the % change in quantity demanded are equal
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4.
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