1B03_CH_5 - Copyright 2006 Nelson, a division of Thomson...

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Unformatted text preview: Copyright 2006 Nelson, a division of Thomson Canada Ltd. Chapter 5 Elasticity Copyright 2006 Nelson, a division of Thomson Canada Ltd. Elasticity is a measure of how much buyers and sellers respond to changes in market conditions. measures how responsive Qd or Qs is to changes in price, income or prices of related goods. allows us to analyze supply and demand with greater precision. Copyright 2006 Nelson, a division of Thomson Canada Ltd. Elasticity of Demand 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. Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. Copyright 2006 Nelson, a division of Thomson Canada Ltd. The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Well denote price elasticity by Ep. Ep = percentage change in Qd percentage change in P = % in Qd % in P Copyright 2006 Nelson, a division of Thomson Canada Ltd. The number we get from our calculations is called the coefficient of elasticity . The size of the coefficient, Ep, will tell us how elastic the good is how responsive demand is to a change in price. Since elasticity will vary, we can define different types of elasticity. Copyright 2006 Nelson, a division of Thomson Canada Ltd. Types of Price Elasticity People respond to changes in price differently depending on various factors. Are there a large number of substitutes? Is the good a luxury or a necessity? How narrowly defined is the market? What about the time period? Copyright 2006 Nelson, a division of Thomson Canada Ltd. Inelastic Demand Quantity demanded does not respond strongly to price changes. The % change in Qd < % change in P Ep < 1 The demand curve would be fairly steep. Example: required textbooks. Your only options to buying a new book is to find a used copy, which may be difficult. Copyright 2006 Nelson, a division of Thomson Canada Ltd. Inelastic Demand Q P D The change in P is proportionally bigger than the change in Q. Copyright 2006 Nelson, a division of Thomson Canada Ltd. Elastic Demand Quantity demanded responds strongly to changes in price....
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This note was uploaded on 03/11/2011 for the course ECON 1B03 taught by Professor Hannahholmes during the Spring '08 term at McMaster University.

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1B03_CH_5 - Copyright 2006 Nelson, a division of Thomson...

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