Ch. 4 Notes Elasticity of Demand
Ch. 4 Notes Elasticity of Demand Econ 1051
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This 2 page Class Notes was uploaded by Lauren Pike on Friday September 11, 2015. The Class Notes belongs to Econ 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Fall 2015. Since its upload, it has received 65 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.
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Date Created: 09/11/15
Chapter 4 Elasticity of Demand Price elasticitv of demand measure of responsiveness of the qty of a product demanded when prices changes 0 elastic demand consumers are very responsive to price changes causes kart changes in qty purchased 0 Ex restaurant meals 0 Inelastic demand consumers pay less attention to price changes large price changes only amuse small change in amount purchased 0 Ex health care 0 Price elasticity coefficient and formula A qty demanded ofx 0 Ed A inprice ofx 0 E A qty demanded ofx A price of x d original qty demanded ofx original price ofx o Midpoints approach ensures consistent results E A qty A price 0 d sum of qtyS2 sum ofpriceSZ 0 Extreme cases 0 perfectly inelastic demand change in price causes no change whatsoever in qty demanded Ed 0 o perfectly elastic demand small price reduction causes buyers to increase purchase from zero to all they can get Ed 00 c Total revenue test 0 importance of elasticity for firms bc relates to effect of price changes on total revenue thus profits 0 total revenue total amount seller receives from sale of a product in a particular time period I TR P x Q 0 total revenue test determines elasticity by examining what happens to total revenue when price changes I when price and total revenue move in the same direction inelastic relationship I when price and total revenue move in opp direction elastic o Determinants of Price of Elasticity of Demand 0 substitutability I increase of substitute goods available increase price elasticity of demand 0 proportion of income I increase price of product relative to one s own income increase in price elasticity of demand I elasticity for low priced items tends to be low but for expensive items it is high luxuries vs necessities I more that a good is considered luxury rather than necessity higher elasticity of demand time product demand more elastic the longer the time period under consideration consumers often need more time to adjust to changing prices I ex consumers may not immediately reduce purchases if price of beef increases 10 but may shift to pork or chicken eventually excise taxes taxes levied on production of a productqty of a product purchased 0 0 higher a tax on product w elastic demand less tax revenue inelastic demand and higher tax more tax revenue
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