Economics 1021A Elasticity

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Unformatted text preview: nd Curve 25.00 20.00 15.00 12.50 10.00 5.00 0 10 20 25 30 40 50 Quantity (pizzas per hour) Price (dollars per pizza) (billions of dollars) Price Total Total Revenue 25.00 Elastic demand 20.00 20.00 15.00 Unit elastic 12.50 10.00 Inelastic demand 5.00 0 350.00 312.50 300.00 300 25 50 Maximum total revenue 250.00 200.00 150.00 100.00 50.00 0 When demand is elastic, price cut increases total revenue 25 When demand is inelastic is inelastic, a price incease will increase total revenue Quantity Quantity (pizzas per hour) 50 Elasticity Elasticity of Demand • Elasticity and total revenue (TR = P × Q) test ↑ Price causes When demand is – – – inelastic (η < 1) unit elastic (η = 1) elastic 1) elastic (η > 1) ↑ TR no change TR change TR ↓ TR Factors That Affect Price Factors That Affect Price Elasticity Elasticity of Demand • Substitutes (necessities vs. luxuries) • Habit • Income, proportion, spent on the good • Time elapsed since the price change Acronym courtesy of John Palmer Cross Cross Elasticity of Demand • measures responsiveness of quantity demanded good A to Δ P good B Δ = % change quantity demanded of product A Δ % change price of product B · elasticity > 0 substitutes · elasticity < 0 complements Income Income Elasticity • Responsiveness of quantity demanded to a change in income = % change in quantity % change in income Income Elasticity Income Elasticity • When ηy > 1 0 < ηy < 1 • ηy < 0 Demand is income elastic (normal good) income inelastic (normal good) negative income elasticity (inferior good) (inferior good) Income Income Elasticity Which of...
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