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Unformatted text preview: Mankiw, Principles of Economics Prepared by Moon Young BAEK Yonsei University, Economics 1 Chapter 5 Elasticity and Its Application 5.1 Introduction z We studied the direction (a qualitative aspect of a change) of the effects that some event or policy causes in Chapter 4. We now discuss the magnitude (quantitative) of the effects in this chapter. 5.2 The elasticity of demand z Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants 5.2.1 The price elasticity of demand and its determinants z Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price . price in change percentage demanded quantity in change percentage demand of elasticity price = z There are some general rules, based on experience, about what determines the price elasticity of demand: ¡ Availability of close substitutes : Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. ¡ Necessities versus luxuries : Necessities tend to have inelastic demands, whereas luxuries have elastic demands. ¡ Definition of the market: Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. ¡ Time horizon: Goods tend to have more elastic demand over longer time Mankiw, Principles of Economics Prepared by Moon Young BAEK Yonsei University, Economics 2 horizons. z Computing the price elasticity of demand d d d d d d d Q P P Q P Q P Q P P Q Q ⋅ Δ Δ = Δ Δ = × Δ × Δ = ) ( ) ( 100 ) ( 100 ) ( | | ε where d Q Δ is the change of the quantity demanded and P Δ is the change in the price 5.2.2 The midpoint method: A better way to calculate percentage changes and elasticities (this subsection may be skipped) z We note that the elasticity from point A to point B seems different from the...
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This note was uploaded on 04/05/2010 for the course ECONOMICS 2009 taught by Professor Lee during the Spring '09 term at Yonsei University.
- Spring '09