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Ch 5 Elasticity - Chapter 5 Elasticity Copyright 2006...

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Chapter 5 Elasticity
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Elasticity is a measure of how much buyers and sellers respond to changes in market conditions. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 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.
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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. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price.
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The price elasticity of demand is computed as the percentage change in the quantity demanded divided by the percentage change in price. We’ll denote price elasticity by Ep. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Ep = percentage change in Qd percentage change in P = % triangleopenup in Qd % triangleopenup in P
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The number we get from our calculations is called the coefficient of elasticity . The size of the coefficient, Ep, will tell us how Copyright © 2006 Nelson, a division of Thomson Canada Ltd. elastic the good is – how responsive demand is to a change in price. Since elasticity will vary, we can define different types of elasticity.
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Types of Price Elasticity People respond to changes in price differently depending on various factors. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 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?
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Inelastic Demand Quantity demanded does not respond strongly to price changes. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 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.
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Inelastic Demand P The change in P is proportionally bigger than the change in Q. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Q D
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Elastic Demand Quantity demanded responds strongly to changes in price. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. The % change in Qd > % change in P Ep > 1 The demand curve would be fairly flat. Example: most manufactures.
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Elastic Demand P The change in Q is proportionally bigger than the change in P. Copyright © 2006 Nelson, a division of Thomson Canada Ltd. D Q
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Perfectly Inelastic Demand Quantity demanded does not respond to price changes at all. Ep = 0 Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
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