Chapter 5 - Elasticity and its application

Chapter 5 - Elasticity and its application - Chapter...

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Unformatted text preview: Chapter Elasticity and Its Application 5 The Elasticity of Demand Elasticity Measure of the responsiveness of quantity demanded or quantity supplied To one of its determinants 2 The Elasticity of Demand Price elasticity of demand Measure of how much quantity demanded of a good responds To a change in the price of that good Percentage change in quantity demanded Divided by the percentage change in price Measures how willing consumers are to buy less of the good as its price rises 3 The Elasticity of Demand Price elasticity of demand Elastic demand Quantity demanded responds substantially to changes in the price Inelastic demand Quantity demanded responds only slightly to changes in the price 4 The Elasticity of Demand Determinants of price elasticity of demand Availability of close substitutes Goods with close substitutes More elastic demand Necessities vs. luxuries Necessities inelastic demand Luxuries elastic demand Definition of the market Narrowly defined markets more elastic demand 5 The Elasticity of Demand Computing the price elasticity of demand Percentage change in quantity demanded Divided by percentage change in price Use absolute value (drop the minus sign) Midpoint method Two points: (Q 1 , P 1 ) and (Q 2 , P 2 ) 6 ] )/ P )/[(P P (P ] )/ Q )/[(Q Q (Q 2 2 1 2 1 2 1 2 1 2 +- +- = demand of elasticity Price The Elasticity of Demand Variety of demand curves Demand is elastic Elasticity > 1 Demand is inelastic Elasticity < 1 Demand has unit elasticity Elasticity = 1 7 The Elasticity of Demand Variety of demand curves Demand is perfectly inelastic Elasticity = 0 Demand curve - vertical Demand is perfectly elastic Elasticity = infinity Demand curve - horizontal The flatter the demand curve The greater the price elasticity of demand 8 Figure The price elasticity of demand (a, b) 1 9 (a) Perfectly inelastic demand: Elasticity = 0 1. an Price Quantity Demand 100 $5 4 1. An increase in price 2. leaves the quantity demanded unchanged (b) Inelastic demand: Elasticity < 1 1. an Price Quantity $5 4 1. A 22% increase in price 2. leads to an 11% decrease in quantity demanded Demand 100 90 The price elasticity of demand determines whether the demand curve is steep or flat. Note that all percentage changes are calculated using the midpoint method. Figure The price elasticity of demand (c) 1 10 (c) Unit elastic demand: Elasticity = 1 1. an Price Quantity $5 4 1. A 22% increase in price 2. leads to A 22% decrease in quantity demanded Demand 100 80 The price elasticity of demand determines whether the demand curve is steep or flat....
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This note was uploaded on 10/26/2010 for the course ECON 002 taught by Professor Eudey during the Spring '08 term at UPenn.

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Chapter 5 - Elasticity and its application - Chapter...

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