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Chapter 4.3 notes

Chapter 4.3 notes. Demand Elasticity. Demand Elasticity. HOW MUCH a change in P causes a change in Qd Elastic – when a change in P causes a relatively larger change in Qd . Ex: green beans, corn, tomatoes, etc. cont’d.

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Chapter 4.3 notes

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  1. Chapter 4.3 notes Demand Elasticity

  2. Demand Elasticity • HOW MUCH a change in P causes a change in Qd • Elastic – when a change in P causes a relatively larger change in Qd. Ex: green beans, corn, tomatoes, etc.

  3. cont’d • Inelastic – a change in P causes a relatively smaller change in the quantity demanded. Ex: table salt, gas • Unit Elastic – a given change in price causes a proportional change in quantity demanded.

  4. Calculating Demand Elasticity Demand Elasticity = %ΔQd %ΔP If the numerator is > denominator = elastic If the denominator is > numerator = inelastic

  5. Total Expenditures Test • TE= P x Qd • If demand curve is elastic – when P down, TE up. (inverse) • If the demand curve is inelastic – P down, TE down and vice versa • If the demand curve is unit elastic – P down OR up and NO change in TE

  6. $4 P × Q = $400 P (TE) Demand 100 Q Total Expenditure Price When the price is $4, consumers will demand 100 units, and spend $400 on this good. Quantity 0

  7. $3 TE = $240 $1 Demand Demand TE = $100 100 80 How TE Changes When Price Changes: Inelastic Demand Price Price An Increase in price from $1 to $3 … … leads to an Increase in TE from $100 to $240 Quantity Quantity 0 0

  8. $5 $4 Demand Demand TE = $200 TE = $100 50 20 How TE Changes When Price Changes: Elastic Demand Price Price An Increase in price from $4 to $5 … … leads to an decrease in TE from $200 to $100 Quantity Quantity 0 0 Note that with each price increase, the Law of Demand still holds – an increase in price leads to a decrease in the quantity demanded. It is the change in TR that varies!

  9. Determinants of D Elasticity • Necessities vs. Luxuries – Necessities usually inelastic • Substitutes goods/services - If no sub, usually inelastic • Portion of income – if uses a large portion of income, usually elastic

  10. Rank the following items from most elastic to least elastic • Honda Accord • Beef • European vacation • Salt • Dijon mustard • steak

  11. Results…? • European Vacation • Honda Accord • Dijon mustard • Steak • Beef • salt

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