Ch. 5 Sec. 1

Ch. 5 Sec. 1 - chapter 5 > Elasticity Section 1: Defining...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
>> Elasticity Section 1: Defining and Measuring Elasticity chapter 5 Luis Tellez, who is a trained economist, knew that to calculate the cut in oil output needed to achieve his price target, he would have to know the price elasticity of demand for oil. The Price Elasticity of Demand Figure 5-1 shows a hypothetical world demand curve for oil. At a price of $20 per barrel, world consumers would demand 10 million barrels of oil per day (point A ); at a price of $21 per barrel, the quantity demanded would fall to 9.9 million barrels (point B ). Figure 5-1, then, tells us the response of the quantity demanded to a particular change in the price. But how can we turn this into a measure of price responsiveness? The answer is to calculate the price elasticity of demand . The price elasticity of demand compares the percent change in the price to the per- cent change in quantity demanded as we move along the demand curve. As we’ll see later in this chapter, the reason economists use percent changes is to get a measure
Background image of page 1

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

View Full DocumentRight Arrow Icon
that doesn’t depend on the units in which a good is measured (say, gallons versus bar- rels of oil). But before we get to that, let’s look at how elasticity is calculated. To calculate the price elasticity of demand, we first calculate the percent change in the quantity demanded and the corresponding percent change in the price as we move along the demand curve. These are defined as follows: (5-1) % change in quantity demanded 100 and (5-2) % change in price 100 In Figure 5-1, we see that when the price rises from $20 to $21, the quantity demanded falls from 10 million to 9.9 million barrels, yielding a change in the quan- tity demanded of 0.1 million barrels. So the percent change in the quantity demand- ed is % change in quantity demanded 100 = 1% The initial price is $20 and the change in the price is $1, so the percent increase in price is % change in price 100 = 5% To calculate the price elasticity of demand, we find the ratio of the percent change
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/13/2010 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell.

Page1 / 7

Ch. 5 Sec. 1 - chapter 5 > Elasticity Section 1: Defining...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online