What effect does a change in price have on the quantity demanded?

Elasticity of demand is the response to price change for different goods

How do different goods respond to being dropped? An anology

DROP A SOCCER BALL ? GOOD RESPONSE ELASTIC

BUT, DROP A FORK LIFT ? NOT MUCH RESPONSE INELASTIC

If the response of quantity demanded to a price change is proportional It’s called unit elastic

Suppose gas cost $3.00 a gallon But now it’s $3.50 (3/3.5=.857) .5/{6.5/2} = .5/3.25 = .15 or 15% If you had previously bought 40 gallons a week, about how many would you purchase if gas is unit elastic? .857 X 30 = 25.71 30 – 25.71 = 4.29 4.29/{55.71/2} = 4.29/27.85 =.15

Qualities that affect Elasticity of Demand Substitutability Proportion of income spent on product Luxury or necessity? Habit-forming? Time

Elasticity coefficients εd = percentage change in quantity demanded percentage change in price Hot tip !!! To solve for Percentage Change: The new less the old by “the old plus the new, divided by two”

MIDPOINT OR Arc METHOD ∆ Q εd = (Q+Q1)/2 ∆P (P+P1)/2

example Price X quantity = total revenue $10 X 10 = $100 2 2 εd = (10+12)/2 = 11 = .18 = 1.8 elastic 1 1 = .10 (10+9)/2 = 9.5 {2 X 9.5} = 20 = 1.8 {11 x 1} = 11

Quick quiz: What the coefficients mean εd > 1 εd < 1 εd = 1 Elastic Inelastic Unit Elastic

Summarizing Price Elasticity of Demand Elasticity Coefficient Term Description Impact on TR of price increase Impact on TR of price decrease Greater than 1 εd > 1 Elastic Quantity demanded changes by a larger percentage than does price Total revenue decreases Total revenue increases Equal to 1 εd = 1 Unit Quantity demanded changes by the same percentage as does price Total revenue unchanged Proportion proportion Less than 1 εd < 1 Inelastic Quantity demanded changes by a smaller percentage than does price