Chapter 5: Price Elasticity of Demand
Perfectly Inelastic
-A condition in which the quantity demanded does not change as the price changes. -Perfectly inelastic demand is a condition in which the quantity demanded does not change as the price changes.
Price Elasticity of Demand
-Formula to measure the degree of consumer responsiveness, or sensitivity, to a change in price. -Price elasticity of demand is the ratio of the percentage change in the quantity demanded of a product to a percentage change in its price. -Elasticity of demand explains how strongly consumers react to a change in price. -EX. Price elasticity of demand measures how "stretchy" the rubber band is when the price changes. -Ed= percentage change in quantity demand/percentage change in price
The responsiveness of the quantity demanded to a change in price determines the value of the elasticity coefficient. There are three possibilities:
1. The numerator is greater than the denominator 2. The numerator is less than the denominator 3. The numerator equals the denominator
Perfectly Elastic
A condition in which a small percentage change in price brings about an infinite percentage change in quantity demanded.
Unitary Elastic
A condition in which the percentage change in quantity demanded is equal to the percentage change in price.
Inelastic
A condition in which the percentage change in quantity demanded is less than the percentage change in price.
Demand Elastic
Demand is elastic when the elasticity coefficient is greater than 1. Because the percentage change in quantity demanded is greater than the percentage change in price, the drop in price causes total revenue (TR) to rise.
Midpoint formula
Ed= change in quantity/sum of quantities/2 divided by change in prices/sum of prices/2
Elastic
Elastic demand is a condition in which the percentage change in quantity demanded is greater than the percentage change in price.
Inelastic Demand
Inelastic demand is a condition in which the percentage change in quantity demanded is less than the percentage change in price.
Total Revenue
Total revenue is the total number of dollars a firm earns from the sale of a good or service, which is equal to the price multiplied by the quantity demanded.
