ECO100 Sept 26.docx - ECO100 Total expenditure = price x...

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ECO100 September 26, 2016 Total expenditure = price x quantity How does total expenditure change when the price falls? TX (p) = p x Qd (p) Elasticity and Total Expenditure When demand (or supply) are elastic, quantity will adjust to clear markets an prices won’t move much When inelastic, prices have to adjust since quantities won’t change much This has a natural interpretation for whether the fall in p or rise Qd(p) has a larger effect (dominates) If demand is elastic, the quantity change dominates and total revenue rises Rise in Qd outweighs fall in p, so Tx(p) increases If demand is inelastic, the price change dominates and total revenue falls Fall in p outweighs rise in Qd, so TX(p) decreases If demand is unit elastic, the percentage change in quantity demanded equals the percentage change in price and total Price Elasticity of Supply Price elasticity of supply is a measure of the responsiveness of quantity supplied to a change in the product’s own price It is denoted by Ns and is defined as: Percentage change in quantity supplied/percentage change in price At a particular price and quantity, a 1% change in Ease of substitution If the price of a product rises, how much more can be produced profitably depends on how easy it is for producers to shift from the production of other products to the one whose price has risen Short Run and Long Run
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