Lecture 4.docx - Price elasticity of demand η= Change∈QD ΔQ D/QD = Change∈P Δ P P Use average P and QD(i.e P and QD so that is… …the same for

Lecture 4.docx - Price elasticity of demand η= Change∈QD...

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Price elasticity of demand ( η = % Change Q D % Change P = ΔQ D / Q D Δ P / P Use average P and Q D (i.e. P and Q D ) so that is… …the same for a price rise as for a price fall Ignore negative sign, treat as a positive number Elasticity along linear demand is not constant, i.e. > 1 at prices above mid-point 10 to 20 – mid point is 15 = 1 at mid-point < 1 at prices below mid-point There are no units for elasticity Classification of Elasticities EC120 Lecture 4 – Elasticity and Tax incidence 1 of 18
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P Q      = 1   completely inelastic (vertical demand curve) if you change the price nothing happens to quantity demand   < 1 inelastic = 1 unit elastic (elasticity is constant)   elastic percent change in quantity demand is greater then percent change in price   infinitely elastic (horizontal) EC120 Lecture 4 – Elasticity and Tax incidence 2 of 18
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Determinants of Elasticity depends on the ability & willingness of buyers to substitute between products and is higher …- They have to be willing to substitute given a price change …in long-run than in the short-run Gas . η = 0.09 (short-run), η = 0.31 (long-run) Small category - small category of goods has many substitutes so elasticity is large …if goods have closer substitutes Soft drinks . η = 0.9 (industry), η = 3.8 (Coca-Cola) …if good’s price is a larger part of buyers income EC120 Lecture 4 – Elasticity and Tax incidence 3 of 18
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Cars . η = 3.5 (BMW 735i), η = 6.4 (Mazda323) Sources. Berry, Steven ;
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  • Spring '08
  • Zeiss

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