Ecn 201 1st Edition Lecture 8Outline of Last Lecture I. EquilibriumII. Excess Supply and DemandIII. Shifting of CurvesIV. Simultaneous Curve ShiftsOutline of Current LectureI. Price Elasticity of DemandII. Midpoint MethodIII. Interpreting the Price Elasticity of DemandCurrent LectureElasticityPrice Elasticity of Demand-We know there is an inverse relationship between price and quantity demanded, but how much does quantity demanded change when price changes?-Price elasticity of demand = the percentage change in quantity demanded divided by the percentage change in price.% change in quantity demanded = (Change in quantity demanded)/(Initial quantity demanded) × 100% change in price = (Change in price)/(Initial price) × 100-Example: If the price of oil increases by 10% and the quantity demanded falls by 5%, then the price elasticity of demand for oil is: (-5%) / (10%) = -0.5-Since we know that price and quantity demanded will always move in opposite directions, we usually drop the minus sign (for price elasticity of demand ONLY)-Elasticity is NOT equal to slope, but slope is related in the equation-Easier method for calculating the price of elasticity of demand:E = (Change in Quantity / Change in Price) x (Initial Price / Initial Quantity)-We run into a problem when our percent change calculation depends on our choice of starting point. Sowe use an alternative method to find elasticity…Midpoint Method-Midpoint MethodE = (Change in Quantity / Change in Price) x (Initial price + ending price / initial quantity + ending quantity)-A demand curve is elastic when an increase in price reduces the quantity demanded a lot (and vice versa).These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-When the same increase in price reduces quantity demanded just a little, then the demand curve is inelastic.-If two linear demand (or supply) curves run through a common point, then at any given quantity, the curve that is FLATTER is MORE ELASTIC.-The price elasticity on the same linear curve changes along the curveInterpreting the Price Elasticity of Demand-A good can have a price elasticity as low as zero or as high as infinity.- If the |Ed| < 1, the demand curve is inelastic.- If the |Ed| > 1, the demand curve is elastic.- If the |Ed| = 1, the demand curve is unit elastic.-Quick Quiz: Elastic (E) or Inelastic (I)- Mountain Dew - I- Cigarettes – I (because of addiction)- Yachts – E - Gasoline - I- Expensive Vacations - E- Rice – it depends on if you’re willing to use substitutes, etc.-Economists (and many others) are interested in price elasticity of demand. Estimating elasticity is crucialto understanding and predicting market outcomes.-Total revenue: price times quantity demanded (sold).TR = P × Q-The total revenue at any given price is equal to the area of a rectangle whose height is the price and whose width is the quantity demanded at that price.-When demand is inelastic, the price effect dominates the quantity effect. Total revenue will rise.-When demand is elastic, the quantity effect dominates the price effect. Total revenue will