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mankiw ch5

# mankiw ch5 - Ch 5 Elasticity Ch 5 Pg 1 5 Instructor:Dr Fred...

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5 Ch. 5 - Elasticity Instructor:Dr. Fred Aswani What happens to the quantity demanded when the price of a good changes? IF quantity changes a lot, we say that demand is elastic (= quantity stretches a lot) If quantity changes a little, demand is inelastic (= quantity does not stretch much) How do we compute a lot versus a little ? Price elasticity of demand = % change in quantity demanded / % change in price = %Δ Q D / %Δ P (Holding everything else constant-Income, tastes, prices of other goods...) Possible Values: ( See Figure 5 - 1) Ch. 5 Pg. 1

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Ranges between 0 and infinity When 0 # E < 1, demand is inelastic When E > 1, demand is elastic When E = 1, demand is unit elastic When E = 0, perfectly inelastic When E = 4 , perfectly elastic (Note that although price and quantity demanded move in the opposite directions, by convention elasticity is positive) We consider the absolute value. Ex: if the price of gas goes up by 50%, and the quantity demanded falls by 10%, then the elasticity of demand is : - 10% / +50% = 0.2 demand for gasoline is inelastic since it is less than one.
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mankiw ch5 - Ch 5 Elasticity Ch 5 Pg 1 5 Instructor:Dr Fred...

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