Lecture 11

# Lecture 11 - Percentage change in price =(new \$ initial \$...

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February 6, 2009 How to measure revenue? TR = P*Q Why couldn’t oil producers simply raise prices? What was their motivation to cut output? Why is volume important to their calculations? When prices are high, people are more sensitive to changes (elasticity) Elasticity determines how TR will react given a price change Sensitivity = Elasticity w.r.t. = with respect to Elasticity of x wrt y = abs( %change x / %change y) Price elasticity of demand – a measure of the extent to which the QD of a good changes when the price of the good changes Price elasticity of demand = abs (% change Qd/ %change P)

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Unformatted text preview: Percentage change in price = [(new \$ - initial \$)/ initial price] *100 Midpoint Method: To calculate the %change in the price divide the change in the price by the AVERAGE price and then multiply by 100 Elastic demand: > 1 United elastic demand: = 1 Inelastic demand: < 1 Elasticity is how sensitive people are to a change in price Slopes are NOT tied to elasticity. Similar but not the same Elasticity has no units so we can compare to everything but slopes we can’t The more substitutes, the more sensitivity...
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