Chapter Outline - Ch.4 - Elasticity and Its Uses

Chapter Outline - Ch.4 - Elasticity and Its Uses -...

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Microeconomics - Chapter 4 Outline – 9/19/07 Elasticity is a measure of how sensitive one variable is to another. o In the case of the supply and demand model, elasticity measures how sensitive the quantity of a good that people demand, or that firms supply is to the price of the good. DON’T CONFUSE SLOPE WITH ELASTICITY- SLOPE IS NOT A GOOD INDICATOR OF ELASTICITY!!! ELASTICITY OF DEMAND Defining the Price Elasticity of Demand o The Price elasticity of demand is a measure of the sensitivity of the quantity demanded of a good to the price of the good. “Price elasticity of demand” is sometimes shortened to “elasticity of demand,” the “demand elasticity,” or even simply “elasticity” when the meaning is clear from the context. Refers to the entire demand curve. o The price elasticity of demand is a measure of how much the quantity demanded changes when the price changes. o When economists say that the price elasticity of demand for a good is high, they mean that the quantity of that good demanded by people changes by a LARGE amount when the price changes ( sometimes a horizontal demand curve). o If the elasticity of demand is reported as being low, they mean that the quantity of that good demanded changes by only a SMALL amount when the price of bread changes ( sometimes a vertical demand curve) o PRICE ELASTICITY OF DEMAND : The percentage change in quantity demanded divided by the percentage change in the price. The numerator of this formula is the percentage change in quantity demanded when the price changes by the percentage amount shown in the denominator. o Remember, that as price increases , the quantity demanded decreases . o ELASTICITY IS A WAY TO DETERMINE HOW MUCH QUANTITY DEMANDED changes when the price changes The Impact of a Change in Supply on the Price of Oil o If the elasticity is very high, then only a small increase in the price is enough to get people to reduce their use of oil and thereby bring the quantity demanded down to a lower quantity supplied.
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o On the other hand, when the elasticity is very low, a large increase in price is needed to get people to reduce their use of oil and bring the quantity demanded down to the quantity supplied. REVIEW The price elasticity of demand is a number that tells us how sensitive the quantity demanded is to the price. It is defined as the percentage change in the quantity demanded divided by the percentage change in the price WORKING WITH DEMAND ELASTICITIES To compute the percentage change in the numerator and denominator of the elasticity of demand, we need to divide the change in the variable (the change in price or the change in the quantity demanded) by the variable (price or quantity demanded) Because the quantity demanded is negatively related to the price along a demand curve, the elasticity of demand is a negative number: when (change in Price /
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Chapter Outline - Ch.4 - Elasticity and Its Uses -...

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