Chapter 2 Tutorial Notes

Chapter 2 Tutorial Notes

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Unformatted text preview: ntage change in quantity demanded due to 1 percentage change in price of the product. () Because linear demand curves are downward sloping to the right, ΔQ/ΔP is negative; hence the price elasticity of demand is expressed as a negative number. Perfectly Elastic Demand Curve Perfectly elastic demand curve: When the demand curve is horizontal the price elasticity of demand is -∞; http://upload.wikimedia.org/wikipedia/commons/thumb/8/89/Elasticity -elastic.png/220px-Elasticity-elastic.png Perfectly Inelastic Demand Curve Perfectly inelastic demand curve: When the demand curve is vertical the price elasticity of demand is 0; http://upload.wikimedia.org/wikipedia/commons/thumb/9/99/Elasticity-inelastic.png/220px-Elasticity-inelastic.png Elasticity: Alternative way of looking at elasticity: () The price elasticity approaches zero as P(=a-bQ) gets very small and approaches negative infinity as Q gets very small. Point and Arc Elasticities Point elasticity: ( ) Arc elasticity: ( ( ⁄ ) ⁄ ) Determinants of the own-price elasticity of demand: Number & similarity of substitute goods – the more substitutes and the similar the product, the higher the elasticity. Product’s price relative to a consumer’s total budget. Relatively inexpensive items, such as salt, are inelastic as it is relatively cheap product relative to the ones budget and the consumer often buys it without thinking about the price. The length period to which the demand curve pertains. For non-du...
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This note was uploaded on 02/24/2014 for the course MGCR 293 taught by Professor Salmasi during the Winter '08 term at McGill.

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