Some real world examples Eggs 0 1 Inelastic small portion of income Beef 1 6 Elastic many substitutes Elasticity II Healthcare 0 2 Housing 0 7 Restaurant Meals 2 3 cid 127 Mountain Dew 4 4 Your turn Price 10 20 Calculate price elasticity of demand change in Q 100 50 50 1 change in P 10 20 20 ChangeQ ChangeP 2 Consider the market price for snow shovels Quantity Demanded 100 50 OR 50 100 100 all over 20 10 10 1 ChangeQ ChangeP There are 2 different possibilities this method does not work because there is no starting point Midpoint Method cid 127 We use percents to avoid unit sensitivity cid 127 We use the midpoint method to overcome direction sensitivity DQ Avg Q DP Avg P Q2 Q1 times P2 P1 2 Q2 Q1 2 P2 P1 Q2 Q1 Q2 Q1 P2 P1 P2 P1 DQ cid 229 P cid 229 Q DP A numerical example P 30 40 50 60 70 P 30 40 50 60 70 P 30 Q 300 250 200 150 100 Q 300 250 200 150 100 Q 300 DQ N A 50 50 50 50 cid 229 Q 550 450 350 250 DQ cid 229 P cid 229 P 70 90 110 130 DP 10 10 10 10 cid 229 QDP Product 3500 4500 5500 6500 Product 5500 4500 3500 2500 Ratio cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 250 200 150 100 3500 4500 5500 6500 5500 4500 3500 2500 Q 300 250 200 150 100 Ratio 0 636 1 00 1 57 2 60 0 636 1 00 1 57 2 60 Result Inelastic Unitary Elastic Elastic More Elastic 40 50 60 70 P 30 40 50 60 70 Interpreting Elasticity Results If n 1 then relatively inelastic If n 1 then unitary elastic If n 1 then relatively elastic Elasticity and Total Revenue Thinking about total revenue Q P Total Revenue When price falls from A to B does total revenue increase or decrease Decrease When demand is inelastic A decrease in price leads to smaller increase in Qd So total revenue decreases Inelastic P TR also dec in P dec TR When price falls from A to B Does total revenue increase or decrease Increase When demand is elastic A decrease in price leads to a bigger increase in Qd So total revenue nincreases Elastic P dec TR Also dec P TR cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
View Full Document
Unlocking...