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lectureOutline03 - ECO 100Y Introduction to Economics Topic...

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Unformatted text preview: ECO 100Y Introduction to Economics Topic 3: Elasticity Source: LR12, LR 11 and LR10, Chapter 4, including the Appendix. 1 Topic 3: Elasticity ECO 100 W.G. Wolfson The Concept of Elasticity Elasticity reflects the sensitivity of one variable (V 2 ) to changes in another variable (V 1 ) In general terms, E = % ∆ V 2 / % ∆ V 1 We use percentages to avoid measurement units A value of E > 1 signals sensitivity or “elastic” A value of E < 1 signals insensitivity or “inelastic” 2 Topic 3: Elasticity ECO 100 W.G. Wolfson 1 2 Price Elasticity of Demand E D is measured on a D curve E D = - [% ∆ Q D X / % ∆ P X ] Since D schedules are (usually) negatively-sloped and elasticity values are best shown as positive numbers, we insert a negative sign Short version of formula: E D = - [% ∆ Q / % ∆ P] The E D signals quantity demanded and own price ECO 100 W.G. Wolfson 3 Topic 3: Elasticity E D = - [% ∆ Q / % ∆ P] and Total Revenue Numerator vs. Denominator Total Revenue = P * Q Value of E D Elasticity Type N > D Increases E D > 1 Elastic N = D Constant E D = 1 Unit Elastic N < D Decreases E D < 1 Inelastic Vice versa for P rises ECO 100 W.G. Wolfson 4 Topic 3: Elasticity N = % ∆ Q D = % ∆ P 3 Price Elasticity of Demand E D is measured on a D curve E D = - [% ∆ Q D X / % ∆ P X ] Since D schedules are (usually) negatively-sloped and elasticity values are best shown as positive numbers, we insert a negative sign Short version of formula:...
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lectureOutline03 - ECO 100Y Introduction to Economics Topic...

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