CHAPTER TWENTY
DEMAND AND SUPPLY:
ELASTICITIES AND APPLICATIONS
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to :
1.
Define demand and supply and state the laws of demand and supply ( review from Chapter 3).
2.
Determine equilibrium price and quantity from supply and demand graphs or schedules (from
Chapter 3).
3.
Define price elasticity of demand and compute the coefficient of elasticity given appropriate data
on prices and quantities.
4.
Explain the meaning of elastic, inelastic and unitary price elasticity of demand.
5.
Recognize graphs of perfectly elastic and perfectly inelastic demand.
6.
Use the total-revenue test to determine whether elasticity of demand is elastic, inelastic, or
unitary.
7.
List four major determinants of price elasticity of demand.
8.
Explain how a change in each of the determinants of price elasticity would affect the elasticity
coefficient.
9.
Define price elasticity of supply and explain how shiftability of resources and time affect it.
10.
Explain by examples the economic effects of price ceilings and floors.
11.
Explain cross elasticity of demand and how it is used to determine substitute or complementary
products.
12.
Define income elasticity and its relationship to normal and inferior goods.
13.
Define and identify the terms and concepts listed at end of the chapter.
LECTURE NOTES
I.
Introduction
A.
Elasticity of demand measures how much the quantity demanded
changes with a given change in price of the item, change in
consumers’ income, or change in price of related product.
B.
Price elasticity is a concept that also relates to supply.
C.
The chapter explores both elasticity of supply and demand and applications of the concept.
D.
The chapter also looks at potential effects of legally fixed prices on individual markets.
II.
Price Elasticity of Demand
A.
Law of demand tells us that consumers will respond to a price decline by buying more of a
product (other things remaining constant), but it does not tell us how much more.

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B.
The degree of responsiveness or sensitivity of consumers to a change in price is
measured by the concept of price elasticity of demand.
1.
If consumers are relatively responsive to price changes, demand is
said to be elastic.
2.
If consumers are relatively unresponsive to price changes,
demand is said to be inelastic
.
3.
Note that with both elastic and inelastic demand consumers behave according to the law
of demand; that is, they are responsive to price changes.
The terms elastic or inelastic
describe the degree of responsiveness.
A precise definition of what we mean by
“responsive” or “unresponsive” follows.
C.
Price elasticity formula:
Quantitative measure of elasticity
, E
d
=percentage change in quantity/ percentage
change in price
1.
Calculate percentage change in quantity by dividing the change in quantity by the
original quantity.

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