Chapter 4

# Chapter 4 - Chapter 4 Elasticity 1 Price Elasticity of...

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Chapter 4: Elasticity 1. Price Elasticity of Demand a. Different outcomes arise from differing degrees of responsiveness of the quantity demanded to a change in price—slope of D curve b. Slope of D curve depends on units in which we measure the price and quantity c. Price elasticity of demand-a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same d. Calculating Price Elasticity of Demand d.i. d.ii. Need to know quantities demanded at different prices when all other influences remain the same d.iii. By using avg price and avg quantity, calculate elasticity at a point on D curve midway between original point and new point d.iv. %Δ Q = (increase or decrease in Q / avg Q demanded) d.v. %Δ P= (increase or decrease in P / avg P) d.vi. Elasticity is the ratio of 2 %Δ’s proportionate change d.vii. If price elasticity comes out negative…ignore the minus sign e. Inelastic and Elastic Demand e.i. Perfectly inelastic demand-quantity demanded remains constant when price changes, price elasticity = 0 e.ii. Unit elastic demand-%Δ in quantity demanded = %Δ in price, price elasticity = 1 e.iii. Inelastic demand-general case where %Δ in quantity demanded is less than %Δ in price, price elasticity < 1 e.iv. Perfectly elastic demand-quantity demanded changes by an infinitely large percentage in response to tiny price change, price elasticity is infinity e.v. Elastic demand-general case in which %Δ in quantity demand exceeds %Δ in price, price elasticity > 1

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Chapter 4 - Chapter 4 Elasticity 1 Price Elasticity of...

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