Lecture%205 - Econ 208 lecture 5 page 1 Lecture 5 Demand...

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Econ 208 lecture 5 page 1 Lecture 5: Demand and Supply Elasticity Elasticity is a general concept applied to measuring the responsiveness of a variable to a change in another variable. Thus, we can speak of income elasticity – which is the responsiveness of quantity demanded to a change in real income, price elasticity, which is the response to a change in price; supply elasticity, which is the responsiveness of quantity supplied to change in price and so forth. The definitions all involve the ratio of the percentage change in the dependent variable to the percentage change in the independent variable. In the present case we are looking at price-elasticity. At the end of the last hour I was setting up a taxonomy of price elasticioties: 1. Perfect elasticity e = - ∞, which is to say that a small variation in price gives rise to an infinitely large response. This is graphed as a horizontal line. Recall that price elasticity of demand is always negative because demand curves slope downward. 2. Elastic – in this case - ∞ < e < - 1 3. Unitary elastic e = -1 4. Inelastic: -1 < e < 0 5. Perfectly inelastic e = 0, in which case the demand curve is vertical. No responsiveness to price. Elasticity and total revenue The different elasticities have different implications for the change in the value of sales with respect to change in price. There are three interesting cases: elastic, unitary elastic, and inelastic.
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