T
uesday, Sept. 13
1.
E
lasticity 
Responsiveness of quantity to change in price.
a. Price elasticity of demand  % change in Qd /
% change in P
Calculation of price elasticity of demand:
Use arc elasticity formula:
e
=
(Q
2
 Q
1
)/(Q
1
+ Q
2
)/2
(P
1
 P
2
)/(P
1
+ P
2
)/2
:
e
can be >1 (elastic; relatively responsive),
=1 (unitary elastic)
< 1, (inelastic, relatively unresponsive)
Elasticity  Illustration:
Suppose
P
1
= 25
Q
1
= 100
P
2
=
30
Q
2
= 90
e =
(90100)/((190)/2)
(3025)/((55)/2)
e
= (10)/(95)
= .1053
=
.579
(5)/(27.5)
.1818
The elasticity coefficient is less than 1, so demand is relatively inelastic…
 quantity demanded falls by a relatively small amount with respect to change in price
 total revenue (total expenditure) rises (and falls) with price
Explanation:
The coefficient of elasticity,
e,
is equal to .579. Since it is less than one, it
indicates that demand is inelastic, or
relatively
unresponsive to a change in price. The law
of demand tells us that price and quantity are inversely related, so the coefficient will
always
be a negative number. To simplify things, economists have adopted the
convention of dropping the negative sign (since it's understood) and simply report the
absolute value of the coefficient.
1
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View Full DocumentSince demand is inelastic, price and total revenue (price x quantity) change in the
same direction: when price rises (as in the example) total revenue rises as well.
When demand is elastic (when the coefficient is greater than one) total revenue
would fall when price rises, and rise when it falls.
How do you interpret the coefficient (in this case, .579)? It tells us the percent change in
quantity demand when price changes by 1%. The coefficient of .579 means that, in this
range of the demand curve, an increase in price of 1% will result in a fall in quantity
demanded of .579% (slightly over 1/2 of 1 percent).
When demand is elastic, price increase leads to decrease in total revenue.
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 Fall '11
 Staff
 Supply And Demand, producer, pareto, hybrid car

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