11Lecture

11Lecture - LECTURE 11 ELASTICITY OF DEMAND Reviewing the...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
LECTURE 11 ELASTICITY OF DEMAND Reviewing the last lecture, I drew Dr. Filer's demand curve for candy bars, and asked you to calculate the coefficient of elasticity of demand over the price range of $.80 per bar to $.70 per bar. Recall the formula for the calculation of the coefficient of elasticity of demand. e d = [(P1 + P2) / (Q1 + Q2)] x (EQ/EP) Equation 10-4 At a price of $.80 each, I purchase 2 bars per day. At a price of $.70 each, I purchase 3 bars per day. Plugging these numbers into our formula for the coefficient of elasticity of demand: [(.80 + .70) / (2 + 3)] x (1 / .10) = -3. This was the calculation that we did in class towards the end of Lecture 10. Because the coefficient was greater then 1, we concluded that demand was elastic. As such, price and total revenue should move in opposite directions. When the price is $.80 per bar, I buy two bars per day. Total revenue to the seller from my purchase: $1.60. When the price falls to $.70 per bar, I purchase 3 per day, and the total revenue to the seller from my purchase rises to $2.10. If price falls and total revenue increases, demand is elastic. I ended Lecture 10 by asking you to check my work, and we calculated the coefficient of elasticity of demand for candy over a price change from $.60 per bar to $.40 per bar, and over the price change from $.30 per bar to $.10 per bar. When we did this, you noticed something strange. Remember: "P-over-Q-dQ-dP": At a price of $.60 each, I purchase 4 bars per day. At a price of $.40 each, I purchase 6 bars per day. Plugging these numbers into our formula for the coefficient of elasticity of demand: [(.60 + .40) / (4 + 6)] x (2 / .20) = -1.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
At a price of $.10 each, I purchase 9 bars per day. At a price of $.30 each, I purchase 7 bars per day. Plugging these numbers into our formula for the coefficient of elasticity of demand: [(.10 + .30) / (9 + 7)] x (2 / .20) = -1/4. Rather than my elasticity of demand for candy bars holding steady at a coefficient of -3, implying that I have an elastic demand for candy bars, we calculated, from my single demand curve, that I exhibit not only an elastic demand for candy bars, but an inelastic demand for candy, as well as a unitary-elastic demand for candy bars. How can this be? Look at Figure 11-1. It turns out that a straight-line demand curve does not exhibit a constant coefficient of elasticity of demand at all points on the demand curve. THE COEFFICIENT OF ELASTICITY OF DEMAND AT THE MID-POINT OF A STRAIGHT-LINE DEMAND CURVE IS 1 (IN ABSOLUTE VALUE). THE COEFFICIENT OF ELASTICITY OF DEMAND ANYWHERE ON THE DEMAND CURVE ABOVE THE MID-POINT WILL BE GREATER THAN ONE: DEMAND WILL BE ELASTIC. THE COEFFICIENT OF ELASTICITY OF DEMAND ANYWHERE ON THE DEMAND CURVE BELOW THE MID- POINT WILL BE A FRACTION LESS THAN ONE: DEMAND WILL BE INELASTIC. On a straight-line demand curve, the coefficient of elasticity of demand near
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 15

11Lecture - LECTURE 11 ELASTICITY OF DEMAND Reviewing the...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online