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AP Economics

AP Economics. Mr. Bernstein Module 47: Interpreting Price Elasticity of Demand October 18, 2013. AP Economics Mr. Bernstein. What Does the Value of Elasticity Tell Us? Example: Ed = % ΔQ d /%ΔP = 10; P rises 1% Algebra: % r Q d /1% = 10, so % r Q d = 10% fall in Q d

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AP Economics

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  1. AP Economics Mr. Bernstein Module 47: Interpreting Price Elasticity of Demand October 18, 2013

  2. AP EconomicsMr. Bernstein What Does the Value of Elasticity Tell Us? • Example: Ed = %ΔQd/%ΔP = 10; P rises 1% • Algebra: %rQd/1% = 10, so %rQd = 10% fall in Qd • For a business, this is a dramatic fall in sales due to a small price increase • Elasticity describes the steepness of the demand curve • Elasticity of zero = “perfectly inelastic” – changes in prices have no impact on quantity demanded (vertical) • “Perfectly elastic” – changes in prices have infinitely large impact on quantity demanded (horizontal curve)

  3. AP EconomicsMr. Bernstein Examples of Perfectly Inelastic and Elastic Curves • xxxx

  4. AP EconomicsMr. Bernstein What Does the Value of Elasticity Tell Us? • In general terms: • Inelastic means a steep or steeper curve • Elastic means a flat or flatter curve

  5. AP EconomicsMr. Bernstein Elasticity and Total Revenue • TR = P x Q • Price effect: Raise P, R tends to rise • Quantity effect: Raise P, Qd falls, so R tends to fall

  6. AP EconomicsMr. Bernstein Elasticity along the Demand Curve • TR begins to fall as prices rise and Elasticity grows

  7. AP EconomicsMr. Bernstein Determinants of Elasticity • # of Substitutes • More substitutes, more elasticity • Luxury or Necessity • More necessary, less elasticity • Example: Insulin vs. Bicycles • Share of Income Spent • Larger percent of budget, more elasticity • AKA Expensive vs. Inexpensive • Time • More time involved, more elasticity

  8. AP EconomicsMr. Bernstein Determinants of Elasticity, cont. • Total Revenue (TR) Test • If TR rises as P rises, demand is inelastic • If TR falls as P falls, demand is inelastic • If TR falls as P rises, demand is elastic • If TR rises as P falls, demand is elastic • Elasticity Coefficient Test • If Elasticity >1, it is elastic • If Elasticity <1, it is inelastic

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