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14-18 - Chapter 5 Notes Elasticity and i ts Application...

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Chapter 5 Notes Elasticity and its Application Elasticity – a measure of the responsiveness of quantity demanded or supplied to one of its determinants Price elasticity of demand –a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded by the percentage change in price Determinants of price elasticity of demand o Availability of close substitutes o Necessities versus luxuries o Definition of the market – narrowly defined markets are usually more elastic because it’s easier to find a close substitute for narrowly defined goods o Time horizon – goods more elastic over longer time horizon because people have time to adjust Calculating price elasticity of demand: % change in quantity demanded/% change in price o However, different results depending on whether you go from price A to B or price B to A – different percentage – so to get
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