20 Monday, October 16, 2006

# 20 Monday, October 16, 2006 - P ∆ Q d P ∆ Q d X E d,p =...

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Monday, October 16, 2006 Microeconomics If demand is elastic price and total revenue are opposite If demand is inelastic price and total revenue are the same P ∆ P P 2 – P 1 Slope = = ∆ Q Q 2 d – Q 1 d D Q Q 2 d – Q 1 d % ∆ Q d Q 2 d + Q 1 d Q 2 d – Q 1 d P 2 + P 1 Q 2 d – Q 1 d P 2 + P 1 1 P 2 + P 1 E d,p = = = = = % ∆ P P 2 – P 1 Q 2 d + Q 1 d P 2 – P 1 P 2 – P 1 Q 2 d + Q 1 d Slope P 2 – P 1 P 2 + P 1 Slope large in absolute value = E dp is small in absolute value = Quantity demanded is relatively unresponsive to changes in price = Demand is relatively inelastic Slope small in absolute value = E dp is large in absolute value = Quantity demanded is relatively responsive to changes in price = Demand is relatively elastic P P1 P0 Relatively Elastic D1 D2 Relatively Elastic Q2 Q1 Q0 Q Relatively inelastic means that small change in quantity demanded when price changes Relatively inelastic means that large change in quantity demanded when price changes

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Unformatted text preview: P % ∆ Q d P % ∆ Q d X E d,p = = = 0 E d,p = = = 0 % ∆ P X D % ∆ P Monday, October 16, 2006 Perfectly Elastic D = Perfectly Inelastic Q Q DETERMINANTS OF ELASTICITY 1. Availability of close substitutes a. Lots of substitutes = Demand is more elastic CHARMIN P P1 P0 D = Relatively Elastic Q1 Q0 Q Large b. Few substitutes = Demand is more inelastic INSULIN P P1 P0 D = Relatively Elastic Q1 Q0 Q Small 2. Percentage of income that is spent on a good a. If a good takes of large portion of your income, demand is relative elastic Monday, October 16, 2006 CARS P P1 P0 D = Relatively Elastic Q1 Q0 Q Large b. If a good takes up small portion of your income, demand is relatively inelastic SALT P P1 P0 D = Relatively Elastic Q1 Q0 Q Small...
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