Topic 7: Elasticity of Demand

• Consumer surplus is the benefit that consumer receives over and above that for which they actually pay.
• Consumer surplus is the difference between the maximum price the consumer was willing to pay and what they actually paid, represented by the market price.
• The concept of consumer surplus can be shown graphically on a demand curve as an area below the demand curve, above the price line, and to the right of the price axis.
• The elasticity of demand is calculated as the ratio of percentage change in quantity demanded to percentage change in price.
• Demand is elastic, inelastic or unitary depending on the elasticity of demand.
• The three main determinants of demand are price, income and price of other goods, which gives rise to three main measures of demand elasticity: price elasticity of demand, income elasticity of demand, and cross elasticity of demand.
• Price elasticity of demand measures the degree of responsiveness of quantity demanded of a good to changes in price.
• The category any particular demand falls in depends upon the relative percentage change in price levels, the quantity demanded and the resultant effect upon total revenues.
• Elastic demand is when an increase in price of a particular good causes a significant fall in demand, the demand for that product is said to be elastic.
• Inelastic demand is when an increase in the price of a particular good does not significantly affect the demand for the product, then the demand for such product would be inelastic.
• Unitary demand is when the change in price for a particular product, causes the same change in quantity.
• The Arc formula is used to calculate price elasticity of demand.
• The midpoint formula is used to calculate price elasticity of demand.
• If the price of apples increases from $150 per bag to $250 per bag, resulting in a fall in demand from 250 bags per day to 200 bags, the price elasticity of demand would be -$50.
• The slope of a demand curve depends on the units used to measure quantity but not the units used to measure price.
• If price increase by a certain percentage, the quantity demanded falls by a smaller percentage.
• If price falls by a given percentage, quantity increases by a larger percentage.
• If the price elasticity of demand for a product equals 1, as its price rises the total revenue increases.
• The price elasticity of demand measures the slope of a budget curve.
• Total expenditure/revenue increases if price increases by a given percentage.
• Percentage change in quantity is more than proportionate to the percentage change in price.
• If the price of a garden burger is increased from $8 to $10, the price elasticity of demand equals -4.5 and demand is inelastic.
• Unitary demand occurs when PED = 1.
• When the price of leather increased from $9 to $10 the quantity demanded decreased from 150 unit to 110.
• Total revenue increases if price increase by a certain percentage.
• Calculate the elasticity of demand using the Arc method and interpret the results.
• If the price of buns changes from $900 to $1900 and the quantity demanded changes from 7 to 6, the price elasticity of demand would be -$100.
• 10 percent increase in the quantity of spinach demanded results from a 20 percent decline in its price.
• Total expenditure/revenue falls if price decrease by a given percentage.
• Consumer expenditure remains unaltered in perfectly inelastic and perfectly elastic cases.
• The price elasticity of demand depends on the units used to measure price and the units used to measure quantity.
• If the price of bobby increases from $4 -$5 and the quantity changes from $3 -2, the price elasticity of demand would be -$1.
• If the price of chocolate increases from $5-$10 and quantity decreases from 20-10, the price elasticity of demand would be -$1.
• In this case, student demand for parking permits is inelastic as a significant change in price leads to a comparatively smaller change in demand.
• Factors determining price elasticity of demand include degree of substitutability, time, proportion of income, and degree of necessity.
• Degree of substitutability affects price elasticity as elasticity is greater once there are close substitutes.
• When the price of chicken was $100, 900 was demanded, but when the price fell to $90, 1350 is demanded, indicating a change in revenue and price elasticity of demand.
• Price unitary demand is when the % change in price results in the exact percentage change in quantity demanded, leaving total revenue unchanged.
• Perfectly inelastic demand is when quantity demanded does not respond to price changes, the coefficient is zero, and the graph is a vertical line showing that demand is fixed at all price levels.
• Price inelastic demand is when a percentage change in price brings about a smaller than proportionate change in quantity demanded, resulting in a decrease in total revenue.