Exam 2 Study Guide Econ II

# Exam 2 Study Guide Econ II - ELASTICITY Price Elasticity of...

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ELASTICITY Price Elasticity of Demand: The responsiveness or sensitivity of consumers to a price change is measured by a price elasticity of demand. Modest price changes cause very large changes in the quantity purchased. Economists call this relatively elastic . Substantial price changes cause only small changes in the amount purchased; the demand for such products is relatively inelastic . The Price-Elasticity Coefficient and Formula: Formula - E d = Percentage change in quantity demanded of product X/ percentage change in price of product X. A price change from 4 to 5 dollars, is a 25% percent increase. A price change from 5 to 4 dollars is a 20% decrease. 10 to 20 is 100% increase. 20 to 10 is a 50% decrease. Mid Point Formula: Ed= Change in Q /(sum of q/2 ) / (change in price)/(sum of prices/2) 5-4 price range is (5+4)/2=4.50 10-20 price range is (10+20)/2=15 The price change is now 1 /4.50 or about 22%. And the percentage change in quantity is 10/15, or about 67%. So, the elasticity demand is about 3.

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Elastic Demand: Demand is elastic if a specific percentage change in price results in a larger percentage change in quantity demanded. Example : 2% decline in price of flowers results in a 4% increase in quantity demanded. Ed= .04/.02=2 Inelastic Demand If a specific percentage change in price produces a smaller percentage change in quantity demanded. Example: 2% decline in price of coffee lease to only 1 percent increase in demand. Ed= .01/.02 = .5 Unit Elastic Demand Price change and price demanded are the same. Ex. 2% decline in price results in a 2 percent results in a 2% increase in quantity demanded. Perfectly Inelastic: A change in price results in no change in quantity demanded. Perfectly Elastic: A change in price results in a large change of quantity demanded. Total Revenue: Is the total amount the seller receives from the sale of a product in a particular time period.
TR = P x Q ( Multiply price by quantity demanded and sold by price) Total Revenue Test: If total revenue changes in opposite direction from price, demand is elastic . If total revenue changes in the same direction as price then it is inelastic . If total revenue does not change when price changes, demand is unit elastic . If demand is elastic a decrease in price will increase total revenue. Sold for cheaper but the sale of more items makes up for the change. When price and TR move in opposite directions it is elastic. If demand is inelastic, a price decrease will reduce total revenue. The increase in sales will not fully offset the decline revenue per unit and total revenue will decline. Determinants of Price Elasticity of Demand: Substitutability – The more substitutes available, the greater the price elasticity of demand. Proportion of Income-

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Exam 2 Study Guide Econ II - ELASTICITY Price Elasticity of...

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