Microeconomics Introduction

Responsiveness or sensitivity of consumers to a price change

Modest price changes cause very large changes in the quantity demanded

Ex. Restaurant prices, vacations, soda

Substantial price changes cause only small changes in the amount purchased

Consumers pay very little attention to the cost

Ex- toothpaste, Medicine, tobacco

P- the proportion of income spent on the good

A- availability of close substitutes (the more subs. The more elastic)

I- the importance of a good (luxury v necessity)

D- the ability to delay the purchase (the more time, the more elastic)

Percentage Change in QuantityDemanded of Product X

Percentage Change in Priceof Product X

Ed =

O 18.1

Change in Quantity Demanded of X

Original Price of X

Ed =

Change in Price of X

Original Quantity Demanded of X

÷

W 18.1

Ed=

Change in Quantity

Sum of Quantities/2÷

Change in Price

Sum of Prices/2

W 18.1

A price change from $4-5 is an increase of 25% = ((5-4)/4)

A price change from $5-4 is a decrease of %20 = ((5-4)/5)

Quantity demanded 10-20 From 10 to 20 is an increase of 100% From 20 to 10 is a decrease of 50% This causes the “up versus down problem”

Price and quantity demanded are inversely related which will mean the price-elasticity coefficient will be negative

Economists use absolute value to avoid confusion

Complete the following problem: Price change from $4-5 Demand change from 10-20 Calculate the Ed

Ed= (Chg quant/sum of quant/2) / (Chg price/sum of price/2)

((20-10)/(20+10/2)) / ((5-4)/(5+4)/2) = (10/(30/2)) / (1/(9/2)) = (10/15) / (1/4.5) = .67/.22 = 3

Demand is elastic if a specific percentage change in price results in a larger percentage change in the quantity demanded

Ex- 2% decline in price of flowers results in a 4% increase in quantity demanded

=.04/.02 = 2

***Ed > 1

Demand is inelastic if a specific change in price leads to a smaller percentage change in quantity demanded

Ex- 2% decline in the price of coffee leads to a 1% increase in quantity demanded

Ed = .01/.02 = .5

Ed < 1

A percentage change in price and the resulting percentage change in quantity demanded are the same

Ex- 2% drop in the price of chocolate causes a 2% increase in quantity demanded

Ed = .02/.02

Ed = 1

Extreme situation where a price change results in no change at all in the quantity demanded

Price elasticity coefficient is zero because there is no response to change in price

Ex- diabetic needing insulin or a heroin addict needing drugs

Small price reduction causes buyers to increase their purchases from zero to all they can obtain

Elasticity coefficient is infinity

Total Revenue is the total amount a seller receives from the sale of a product during a particular time period

TR = P x Q

P = Product Price and Q = quantity sold

Note what happens to total revenue when prices change?

If TR changes in opposite direction of price, demand is elastic

If TR changes in the same direction as price, demand is inelastic

If TR doesn’t change when price changes, demand is unit-elastic