Midterm Review

# Midterm Review - UNIT 2 8-12 Price Elasticity of Demand...

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UNIT 2: 8-12 Price Elasticity of Demand: measures how responsive consumers of a particular good or service are to changes in the price of that same good or service The less responsive we are to price changes, the steeper our demand is (prince inelastic) The more responsive we are to price changes, the flatter our demand is (price elastic) Ed = percentage change in the quantity demanded Percentage change in price Calculating percentage change in the quantity demanded… = (new Qd – old Qd) x100 (old Qd) Calculating percentage change in price… = (new P – old P) x100 (old P) Price elasticity of demand numbers will always be negative, or less than zero. This is because there is an inverse, or negative, relationship between price and the quantity that consumers will demand Price and quantity demanded never move in the same direction. Consumers want to buy less when price rises (negative relationship) Price demand for food = -0.4 Example: -1.18, gov increases prices by 20% = 23.6 decrease in cocaine purchases (lower cocaine revenues) Example: computers = -2.3 Computers are more of a luxury Consumers are fairly price responsive to changes in price of computers

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If computer producers try to raise their prices, they will suffer a decrease in their revenues Absolute value: of a number is essentially just the number without a sign; we usually use the absolute value when we compare the size of the number to avoid the problem of negative signs Price Inelastic: goods or services that have a price elasticity of demand (in absolute value) less than 1; the change in the quantity demanded will always be less than the change in price ( l Ed l < 1) When you make more revenue when they grow and sell less asparagus = 0.5  the change in quantity supplied is only half as big as the change in price Price changes more Increase price to earn more revenue Price Elastic: goods or services that have a price elasticity of demand (in absolute value) greater than 1; the change in quantity demanded will always be greater than the change in price ( l Ed l > 1) Revenues increase after you lower your price Quantity changing more Unit Price Elastic: goods or services that have a price elasticity of demand (in absolute value) exactly equal to 1; the change in quantity demanded will always be exactly equal to the change in price ( l Ed l = 1)  the slope is 1 Price change = quantity change Perfectly Price Inelastic: goods or services that consumers are willing and able to purchase a fixed amount, never buying more when the price fell and never buying less when the price rose; no change in quantity demanded regardless of the size of the price change Perfectly vertical demand curve Consumer surplus = 0 Perfectly Price Elastic: goods or services that consumers were willing to pay only one price and would reduce their purchases to zero even if price went up by only a fraction of a cent and increase their purchases to infinity even if price dropped by only a fraction of a cent Perfectly horizontal demand curve Will earn the producer the greatest revenue
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• Fall '08
• RYAN

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