Chapter20

# Chapter20 - ECONOMICS 101 CHAPTER 20 I Elasticity and...

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9/11/2007 E CONOMICS 101 C HAPTER 20 I) Elasticity and Responsiveness definition of elasticity: it measures the proportional responsiveness of one variable with respect to changes in another the responsiveness of quantity to price allows us to calculate the responsiveness of total revenue to price - TR = P x Q I I) The Price Elasticity of Demand definition: a measure of the proportional change in units purchased when price is changed by a given small proportion calculations of the price elasticity of demand always yield negative numbers because if price increased, quantity demanded fails and vice versa many economists compute arc elasticity (because it is more consistent) using midpoints

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9/11/2007 How Total Revenues Change Price Elasticity of Demand Price Increases Price Decrease Perfectly Inelastic (e d = 0) TR increases TR decreases Inelastic (0 < e d < 1) TR increases TR decreases Unitarily elastic ((e d = 1) No changes in TR No changes in TR Elastic ( ∞> e d > 1) TR decreases TR increases Perfectly Elastic (e d = ) TR falls to 0 TR decreases Ranges of Elasticity
9/11/2007 - Price Inelasticity (i) demand is price inelastic if the absolute value of the elasticity coefficient, e d , is less than 1.0 (ii) price changes are proportionally greater than the resulting quantity changes for goods with inelastic demands (iii) goods with inelastic demands products where the amounts you demand are substantially immune to price changes (a) ex: dog food, life saving drugs - Price Elasticity (i) demand is price elastic if the absolute value of the elasticity coefficient

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Chapter20 - ECONOMICS 101 CHAPTER 20 I Elasticity and...

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