Chapter 5

# Chapter 5 - Chapter 5 Elasticity and Its Application The...

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Unformatted text preview: Chapter 5 Elasticity and Its Application The Elasticity of Demand The 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. The price elasticity of demand is the percentage change in quantity demanded due to a percentage change in the price. The Price Elasticity of Demand and Its Determinants Availability of Close Substitutes Necessities versus Luxuries Definition of the Market Time Horizon Computing the Price Elasticity of Demand The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. Price elasticity of dema nd = Per cent age cha nge in qua ntity dema nde d Per cent age cha nge in price The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the price change. 2 1 2 1 2 1 2 1 ( ) /[( ) / 2] Price elasticity of demand = ( ) /[( ) / 2] Q Q Q Q P P P P- +- + The Variety of Demand Curves Inelastic Demand Quantity demanded does not respond strongly to price changes. Price elasticity of demand is less than one. Elastic Demand Quantity demanded responds strongly to changes in price....
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## This note was uploaded on 04/26/2011 for the course ECON 201 taught by Professor Joyce during the Spring '07 term at Drexel.

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Chapter 5 - Chapter 5 Elasticity and Its Application The...

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