3.1 Elasticity

Inverse

We know there is a ____relationship between price and quantity demanded

Price elasticity of demand

measures how much Qd responds to a change in P

Elasticity

is how people respond to a price change

Price Elasticity of demand equation

percentage change in Qd/Percentage change in P

negative

P and Qd move in opposite directions, which would make price elasticity ___

Standard Method

end value - start value/start value x 100%

Midpoint Method

end value - start value/midpoint x 100%

Elasticity of demand equation

Q after - Q before

Q after + Q before

divide by 2

P after - P before

P after + P before

divide by 2

then divide answers by each other

inelastic

Fewer substitutes make it harder for consumers to adjust Q when P changes, so demand is

elastic

Many substitutes? Switching brands when prices change is easy, so demand is

Market

Narrowly defined markets have more elastic demand

the slope

The price elasticity of demand is closely related to ________of the demand curve.

the flatter the curve

the bigger elasticity

the steeper the curve

the smaller elasticity

Demand is perfectly inelastic

Ed = 0 vertical curve (a)

Demand is perfectly elastic

Ed = infinity horizontal curve (e)

Demand curve is inelastic

Ed < 1 (b)

Demand curve is unit elastic

Ed = 1 (c)

Demand curve is elastic

Ed > 1 (d)

total revenue

Elasticity predicts how changes in the price of a good will affect the _________earned by the producers from the sale of that good

P x Q

Revenue =

Higher P means

means more revenue on each unit you sell (price effect)

Sell fewer units (lower Q)

 due to the law of demand (quantity effect)

It depends on the price elasticity of demand.

Which of these two effects is bigger?