{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Gobbet 5 - Elasticity Solution

Gobbet 5 - Elasticity Solution - Gobbet 5 Elasticity...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Gobbet # 5: Elasticity Material adapted from the course text, Harris: Environmental and Natural Resource Economics , 2006 and from Frank and Bernanke: Principles of Economics, 2001 Solution: Price Elasticity of Demand is “the degree of consumer responsiveness to a change in the price of a good or service at a given price” (Harris). Placing this definition in mathematical terms we have the equation of elasticity: ε = (ΔQ/Q) / (ΔP/P) In words this says that elasticity is equal to the change in (Δ means change in) quantity demanded divided by the quantity demanded, all divided by the change in price divided by the price. Hence, we can also say that the elasticity is the percentage change in quantity divided by the percentage change in price. Because it is expressed as a ratio of percentage changes, the resulting elasticity is unit free. This means that we can compare the elasticity or relative responsiveness of diverse goods such as coal and food. Rearranging a few terms we can put this equation in a simpler form. First, we multiply the top and bottom of our fraction by the reciprocal of the denominator and noting that the resulting denominator cancels out ( 29 ( 29 ( 29 ( 29 1 * * P P Q Q P P P P P P Q Q ∆ = ∆ = ε Rearranging, gives ε = (ΔQ * P) / (ΔP * Q) If we rearrange further and split this into two fractions we have ε = (ΔQ/ΔP) * (P/Q) We know that the slope of our demand curve (think rise over run from high school algebra) is
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern