Principles of Economics- Mankiw (5th) 94

Principles of Economics- Mankiw (5th) 94 - 98 PA R T T W O...

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98 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK The numerator is the percentage change in quantity computed using the midpoint method, and the denominator is the percentage change in price computed using the midpoint method. If you ever need to calculate elasticities, you should use this formula. Throughout this book, however, we only rarely need to perform such calcula- tions. For our purposes, what elasticity represents—the responsiveness of quantity demanded to price—is more important than how it is calculated. THE VARIETY OF DEMAND CURVES Economists classify demand curves according to their elasticity. Demand is elastic when the elasticity is greater than 1, so that quantity moves proportionately more than the price. Demand is inelastic when the elasticity is less than 1, so that quan- tity moves proportionately less than the price. If the elasticity is exactly 1, so that quantity moves the same amount proportionately as price, demand is said to have unit elasticity. Because the price elasticity of demand measures how much quantity de-
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