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Lectureslides6

Lectureslides6 - LECTURE 6 Elasticity Econ 1 Winter 2008...

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1 Econ 1, Winter 2008 RATIKA NARAG, Ph.D. LECTURE 6 Elasticity Price Elasticity of Demand – How sensitive is quantity demanded to a changes in the price of the good/service Price Elasticity of Supply – How sensitive is quantity supplied to a changes in the price of the good/service LECTURE 6 Calculate Elasticity E p : the price elasticity coefficient P Q E p % % LECTURE 6 P 1 , P 2 : Prices Q 1 , Q 2 : Quantities 2 2 1 2 1 2 1 2 1 2 P P P P Q Q Q Q E p LECTURE 6 Note: – Own price elasticity of demand is always negative – The price elasticity of supply is always positive – Economists usually refer to the own price elasticity of demand by its absolute value (ignore the negative sign) LECTURE 6 Inelastic Demand/Supply – Elasticity is small (between 0 and 1 in absolute value) – Inelastic supply means that the quantity supplied is not very sensitive to the price – Inelastic demand means that the quantity demanded is not very sensitive to the price
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2 LECTURE 6 Elastic Demand/Supply – Elasticity is large (greater than 1 in absolute value) – Elastic supply means that the quantity supplied is sensitive to the price – Elastic demand means that the quantity demanded is sensitive to the price LECTURE 6 Size of Elasticity Unit Elastic: Own price elasticity = 1 Elastic: Own price elasticity > 1 Inelastic: Own price elasticity < 1 0 1 2 3 4 5 6 Inelastic Elastic Unit Elastic LECTURE 6 Extreme Cases LECTURE 6 E > 1, demand is elastic E < 1, demand is inelastic E = 1, demand is unit elastic E = 0, perfectly inelastic demand E = , perfectly elastic demand LECTURE 6
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