Alright guys, I hope you're excited for this video. This is where I took everything we've learned so far and I put it all onto one page and we just got a ton of information all crammed in here, so let's check it out. So here we go. I've got it nice and organized for you. We're going to start with our price elasticities of demand and supply. So we got our titles there and then I've got your formulas right next to it. Right? I've got those super shorthand. I think you should feel comfortable with reading that by now. We've got percentage change in quantity demanded divided by percentage change in price there, right? So, that's going to be your formula that you should use and then I've got all the different ways you can end up with an answer, right. You're going to be able to analyze your answers based on this column. You're going to get an answer above 1. Boom. You know it's elastic. You can't forget it there. And here I made a note, absolute value. Right? So for both of these, price elasticity of demand and price elasticity of supply, it's always going to be positive numbers, right? Always positive numbers, we use the absolute value, don't worry about negative and positive. And here on the right, I've got the steps that we've been using, right? That step-by-step process to subtract, to add, and remember these steps worked for all of our elasticities that we've worked on so far. The only thing you had to note was what were our 2 variables, right? For price elasticity of demand and supply, we had quantities and price, right? Quantity demanded or quantity supplied and price on the denominator. Same steps, right? Income, right. So that's why I've kind of italicized these is just because those are our 2 variables. I left it as the one for elasticity of demand just because it's the most common one, but you should be comfortable substituting that for income or across price, right? Whatever it is, just use your two variables from the problem. So there you have your price elasticity of demand and supply so you can kind of see how related they are, and then down here we've got our income elasticity of demand and our cross price elasticity of demand, right? The other 2 that we did and they've got some similarities too. So first, just like before I gave you your formulas, percentage change in quantity demanded over percentage change in income or for cross price, percentage change in quantity demanded of good X, right, the first good divided by the percentage change in price of the other good. And then in the next box, I've got how we're going to analyze these, right. When you get your answer, your elasticity, this is how you're going to analyze whether it's a normal good or a substitute complement, whatever we're working with. We've got it all there and I made a quick note here, right, for these 2, the sign does matter. We got to keep the positive or the negative so we're going to have to pay attention to that and that's why I've got the step 6 here. This is where after we've solved our subtraction, addition, midpoint method stuff, we need to make sure that we check the signs of quantity and the sign of price or income, right. So there we go. We kind of have everything about the midpoint method and all our different elasticities in one place, and since we had some extra space on the page, I went ahead and gave you even a little more information here in the bottom. Remember when we talked about the straight line demand curve and where there was a point where we maximize revenue? Boom, we got it right here. To the left of that middle point is going to be elastic, to the right of that middle point is inelastic, at that point, we're unit elastic and that's where we maximize revenue, and we've got a little information about total revenue over here and, what happens with different price changes, right? If the price goes up and total revenue goes up, then we've got inelastic demand just like the other cases there, right? So we've kind of got everything from the chapter on one page here. You guys should feel pretty comfortable using this while you're studying and then you'll ace it once you get to the test. Cool, let's do a couple more practice problems before we wrap up elasticity.
Elasticity Summary: Study with Video Lessons, Practice Problems & Examples
Created using AIUnderstanding price elasticity of demand and supply is crucial for analyzing market behavior. The formula for price elasticity is percentage change in quantity demandedpercentage change in price. An elasticity greater than 1 indicates elastic demand. Additionally, income elasticity and cross-price elasticity help determine the nature of goods—normal, substitutes, or complements—where sign matters. The midpoint method aids in calculations, and recognizing the relationship between total revenue and elasticity is essential for maximizing revenue in various market conditions.
Elasticity Summary
Video transcript
A linear, downward-sloping demand curve is
An increase in the supply of a good will increase the total revenue producers receive if:
A life-saving machine without any close substitutes will tend to have:
Here’s what students ask on this topic:
What is the formula for price elasticity of demand?
The formula for price elasticity of demand (PED) is given by:
∆Q/Q∆P/P
Where ∆ represents the change in quantity demanded (Q) and price (P). This formula calculates the percentage change in quantity demanded divided by the percentage change in price. If the result is greater than 1, the demand is elastic; if it is less than 1, the demand is inelastic.
Created using AIHow do you interpret the value of price elasticity of demand?
The value of price elasticity of demand (PED) indicates how sensitive the quantity demanded of a good is to a change in its price. If PED > 1, demand is elastic, meaning consumers are highly responsive to price changes. If PED < 1, demand is inelastic, indicating consumers are less responsive to price changes. If PED = 1, demand is unit elastic, meaning the percentage change in quantity demanded is equal to the percentage change in price. Understanding PED helps businesses and policymakers make informed decisions about pricing and taxation.
Created using AIWhat is the midpoint method for calculating elasticity?
The midpoint method is used to calculate elasticity to avoid discrepancies caused by the direction of change. The formula for price elasticity of demand using the midpoint method is:
∆Q/Q+Q'2∆P/P+P'2
Where ∆ represents the change in quantity (Q) and price (P), and Q' and P' are the initial quantities and prices. This method provides a more accurate measure of elasticity by averaging the initial and final values.
Created using AIWhat is the difference between income elasticity of demand and cross-price elasticity of demand?
Income elasticity of demand (YED) measures how the quantity demanded of a good responds to changes in consumer income. The formula is:
∆Q/Q∆I/I
Where ∆ represents the change in quantity demanded (Q) and income (I). A positive YED indicates a normal good, while a negative YED indicates an inferior good.
Cross-price elasticity of demand (XED) measures how the quantity demanded of one good responds to changes in the price of another good. The formula is:
∆Q_X/Q_X∆P_Y/P_Y
Where ∆ represents the change in quantity demanded of good X (QX) and the price of good Y (PY). A positive XED indicates substitute goods, while a negative XED indicates complementary goods.
Created using AIHow does elasticity affect total revenue?
Elasticity significantly impacts total revenue (TR), which is calculated as price (P) multiplied by quantity demanded (Q). If demand is elastic (PED > 1), a price increase will lead to a proportionally larger decrease in quantity demanded, reducing total revenue. Conversely, if demand is inelastic (PED < 1), a price increase will lead to a smaller decrease in quantity demanded, increasing total revenue. When demand is unit elastic (PED = 1), changes in price do not affect total revenue. Understanding this relationship helps businesses set optimal pricing strategies to maximize revenue.
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