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2011 Business 2 Text Update

# 2011 Business 2 Text Update - This first page gives a...

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This first page gives a listing of the corrected lecture text pages that follow. Print these corrected pages and insert in the lecture text. BUSINESS Date Added Lecture Page Number Description 03/14/2011 B-2 48-54 Make material ancillary

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Business 2 Becker Professional Education | CPA Exam Review B2- 48 © 2010 DeVry/Becker Educational Development Corp. All rights reserved. A N C I L L A R Y M A T E R I A L (for Independent Review) d. Summary The table below summarizes the relationship between the price elasticity of demand and total revenue. Price Elasticity of Demand Implied Elasticity Impact of a Price Increase on Total Revenue Impact of a Price Decrease on Total Revenue Elastic Greater than 1 Total revenue decreases Total revenue increases Inelastic Less than 1 Total revenue increases Total revenue decreases Unit Elastic Equal to 1 Total revenue is unchanged Total revenue is unchanged B. Price Elasticity of Supply The price elasticity of supply is calculated the same way as the price elasticity of demand, except that the change in quantity supplied is now measured. 1. Formula for Price Elasticity of Supply s % change in quantity supplied e = Price Elasticity of Supply = % change in price 600 (new supply) - 500 (old supply) 100 % Change = = = 20% in Quantity 500 (old supply) 500 Divided by: \$1 % Change = in Price s 1 (new price) - \$10 (old price) 1 = = 10% \$10 (old price) 10 20% e = Price Elasticity of Supply = = 2 10% 2. Price Inelasticity (supply < 1.0) Supply is price inelastic if the absolute price elasticity of supply is less than 1.0. If supply is perfectly inelastic, the price elasticity of supply equals zero. Perfectly inelastic supply curves are vertical, which reflects that quantity supplied is insensitive to price changes. 3. Price Elasticity (supply > 1.0) Supply is price elastic if the absolute price elasticity of supply is greater than 1.0. 4. Unit Elasticity (supply = 1.0) Supply is unit elastic if the absolute price elasticity of supply is equal to 1.0. 5. Factors Affecting Price Elasticity of Supply a. Feasibility of customers storing the product will affect the price elasticity of supply. For example, it may result in high elasticity if the product can be stored and does not have to be bought today. b. The time it takes to produce and supply the good will affect the price elasticity of supply. For example, longer production time leads to lower price elasticity.