Unit One: Chapters 3 and 4- Elasticity of Demand

ELASTICITY OF DEMAND

Notes from (1/13/16-1/14/16)

Elasticity of Demand- A measure of how consumers react to a ∆ in price

TYPES OF DEMAND

Elastic Demand- Demand that is very sensitive to a ∆ in price

- E > 1 

-Product is not a necessity and there are available substitutes  

• Examples: Soda, Steak, Candy, Fur Coats

Inelastic Demand- Demand that is not very sensitive to a ∆ in price 

- E < 1 

-Product is a necessity with few to no substitutes

-People will buy no matter what

• Examples: Gas, Salt, Medication, Milk

Unit/ Unitary Elastic Demand

- E = 1

Price Elasticity of Demand (PED) 

3 IMPORTANT STEPS

1.) Quantity

New Quantity - Old Quantity

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Old Quantity

2.) Price

New Price - Old Price

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Old Price

3.) PED

% ∆ in QD

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% ∆ in Price

P.S. At the end of the 3rd step, you take the ABSOLUTE VALUE of the number so you always end up with a positive number! 

Total Revenue- The total amount of money a firm receives from selling goods and services

TR = PQ

Fixed Cost-  A cost that does not change no matter how much is produced 

• Examples- Rent, Mortgage, Insurance, Salaries

Variable- A cost that rises or falls depending upon how much is produced

• Example- Electricity

Marginal Cost- The cost of producing one more unit of a good

• Prior TR - New TR