Lecture 5 - Lecture 5 Review: Elasticity along Linear...

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1 Lecture 5 Review: Elasticity along Linear Demand Curve Profit-Maximizing Production Decision for Monopolist Comparison of Monopoly and Perfect Competition Price elasticity of demand Note : price elasticities are always expressed as a positive number, for convenience we know that P and Qd always move in opposite directions so price elasticity of demand will always negative. we are interested in the magnitude of changes, so use absolute value so “more”/“less” mean what we want them to. ε > 1 elastic ε < 1 inelastic ε = 1 unit elastic Alternative mathematical expressions for price elasticity of demand ε = % Δ Q /% Δ P = ( Δ Q/Q) / ( Δ P/P) – now just rearrange. .. ε = ( Δ Q/Q) × (P/ Δ P )=( Δ Q/ Δ P) × (P/Q) = – to get… ε = (P / Q) × (1 / slope) – “point-slope method” Graphical interpretation of elasticity P Q P Q P - Δ P Q + Δ Q D A Δ P Δ Q Price elasticity & linear demand • Price elasticity changes along a straight-line demand curve P Q Pmax/2 Qmax / 2 D ε > 1 ε < 1 ε = 1 Point-slope method: elasticity along a linear demand curve • Demand Curve – High P, Low Q – Low P, High Q • Slope is constant on linear demand curve ε = (P / Q) × (1 / slope)
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2 Elasticity and total revenue (TR=P*Q) • When price elasticity > 1, changes in price and changes in total revenue move in opposite directions – decrease in price results in an increase in TR – increase in price results in a decrease in TR • When price elasticity < 1, changes in price and changes in total revenue move in the
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Lecture 5 - Lecture 5 Review: Elasticity along Linear...

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