1001majorch4

# 1001majorch4 - ECON1001AB IntroductiontoEconomicsI...

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ECON 1001 AB Introduction to Economics I Dr. Ka-fu WONG Fourth week  of tutorial sessions KKL 925, K812, KKL 106 Clifford CHAN KKL 1109 givencana@yahoo.ca

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Covered and to be covered Covered last week Dr. Wong finished up to kf004.ppt You should have at least read up to Chapter 4 Elasticity . If not, please press hard on them. We are getting to the first midterm! Start reading Chapter 5 Demand: The Benefit Side of the Market Your first midterm covering chapter 1 – chapter 4 will be held on this Saturday October 6, 2007 at 9am To be covered in the tutorial sessions this week Problems in chapter 4: #1, #3, #5, #7 and #9 You are advised to work on the even ones as well
Problem #1, Chapter 4 On the accompanying demand curve, calculate the price elasticity of demand at points A, B, C, D and E. 0 Quantity Price 100 A B C D E 100 75 50 25 25 50 75

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Solution to Problem #1 (1) Price elasticity of demand refers to the percentage change of quantity demanded relative to the percentage change of price In other words, price elasticity of demand indicates how much will the quantity demanded change with respect to a 1% change in price Thus, it measures the responsiveness of quantity demanded to change in price
Solution to Problem #1 (2) Price elasticity of demand is always a negative index, as the demand curve is downward sloping For convenience, we always take absolute value of a price elasticity of demand When the absolute value of a price elasticity of demand is greater than one , that means percentage change in quantity demanded is greater than percentage change in price If this is the case, we regard the highly responsive demand as ELASTIC

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Solution to Problem #1 (3) When the absolute value of a price elasticity of demand is less than one , that means percentage change in quantity demanded is less than percentage change in price If this is the case, we regard the weakly responsive demand as INELASTIC When the absolute value of a price elasticity of demand is exactly equal to one , that means percentage change in quantity demanded is the same as percentage change in price If this is the case, we regard the mirror-responsive demand as UNITARY ELASTIC
Solution to Problem #1 (4) General formula for (Own) Price Elasticity of Demand: (Change of quantity demanded / Total quantity demanded) / (Change of price / Original Price) Rearranging terms, we will get (Change in quantity demanded / Change in price) * (Original Price / Total quantity demanded) (1 / Slope of the demand curve) * (P / Q) Using the formula, we can derive price elasticity of demand at any point along the demand curve

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Solution to Problem #1 (5) Point A 1 / Slope of the demand curve 1 / (-100/100) = -1 Price is \$100 and quantity demanded is 0 Price elasticity of demand = -1 * (100 / 0) Price elasticity of demand = Infinity The demand is perfectly elastic Point B
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## This note was uploaded on 04/21/2011 for the course ECON 1001 taught by Professor S.c during the Fall '10 term at HKU.

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1001majorch4 - ECON1001AB IntroductiontoEconomicsI...

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