Elasticity of Demand

Elasticity of Demand

A measure of how consumers react to a change in price 

elastic demand: demand that is very sensitive to a change in price

E>1

The product is not a necessity and there are available substitutes

inelastic demand: demand that is not very sensitive to a change in price 

E<1

The product is a necessity and there are a few substitutes and people will buy no matter what

unit/unitary demand

E=1

How to calculate price elasticity of demand (PED):

1. Have to calculate the quantity(new quantity-old quantity/ old quantity)
2. Price (new price-old price/ old price)
3. PED (percentage change in quantity demanded/ percentage change in price*100)

*the first four minutes of this video are helpful explaining the difference between elastic and inelastic demand

Total revenue: the total amount of money a form receives from selling goods and services (p*q=tr)

Fixed cost: a cost that doesn't change no matter how much of a good is produced (mortgage, rent, insurance) 

Variable cost: a cost that rises or falls depending upon how much is produced 

Marginal cost: cost of producing one more unit of a good 

Formulas:

TFC+TVC=TC

AFC+AVC=ATC

TFC/Q=AFC

TVC/Q=AVC

AFC*Q=TFC

AVC*Q=TVC

new TC-old TC=MC

TC/Q=ATC