Elasticity, ch. 4
I.
Price Elasticity of Demand
1.
Units-free measure of responsiveness of quantity demanded of good to a change
in its price when all other influences on buyers’ plans remain same
b.
Calculating Price Elasticity of Demand
1.
Price elasticity of demand= percentage change in quantity demanded
Percentage change in price
2.
Express changes in price and quantity demanded as percentages of average price
and average quantity
ii.
Units-Free Measure
1.
Percentage change in each variable is independent of units in which variable
measured
iii. Minus Sign and Elasticity
1.
When price of good rises, quantity demanded decreases along demand curve
2.
Magnitude, or absolute value, of price elasticity of demand that tells how
responsive, elastic, demand is
c.
Inelastic and Elastic Demand
1.
Perfectly inelastic demand
a.
If quantity demanded remains constant when price changes, then price
elasticity of demand is zero
b.
Ex. Insulin, important to diabetics, so if price rises or falls, do not change
quantity bought
2.
Unit elastic demand
a.
If percentage change in quantity demanded equals percentage change in price
b.
Price elasticity equals 1
3.
Inelastic demand
a.
Percentage change in quantity demanded is less than percentage change in
price
4.
Perfectly elastic demand
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a.
Quantity demanded changes by infinitely large percentage to tiny price
change, then price elasticity of demand is infinity
b.
Ex. Soft drink from two machines located side by side
i.
If one price goes up, then buy from other
5.
Elastic demand
a.
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- Spring '09
- Blanchard
- Supply And Demand, quanti ty
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