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Chapter 7 Notes

# Chapter 7 Notes - [ChapterSeven :Elasticities...

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[Chapter Seven] Describing Supply and Demand: Elasticities Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. Use the terms price elasticity of supply and price elasticity of demand to describe the responsiveness of quantities to changes in price. 2. Calculate elasticity graphically and numerically. 3. Distinguish five elasticity terms that are used to differentiate varying degrees of responsiveness. 4. Explain the importance of substitution in determining elasticity of supply and demand. 5. Relate price elasticity of demand to total revenue. 6. State how other elasticity concepts are useful in describing the effect of shift factors on demand. 7. Explain how the concept of elasticity makes supply and demand analysis more useful. Chapter Outline Describing Supply and Demand: Elasticities Example: Jet Blue was hoping that quantity of air travel demanded was highly responsive to price, so it set its prices much lower than its competitors. Price Elasticity Price Elasticity of Demand, E D : “the percentage change in quantity demanded divided by the percentage change in price.” Price Elasticity of Supply, E S : “the percentage change in quantity supplied divided by the percentage change in price.”

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Economists talk about the elasticity of demand as a positive number (or as the absolute value), because it is always negative. A larger number for price elasticity of demand means quantity demanded is more responsive to price. What Information Price Elasticity Provides Numerical examples: A price elasticity of 0.3 means a 10% rise in price will lead to a 3% decrease in quantity demanded; a price elasticity of 5 means a 10% rise in price will lead to a 50% decrease in quantity demanded. Classifying Demand and Supply as Elastic or Inelastic Elastic: when “the percentage change in quantity is greater than the percentage change in price (E > 1).” Inelastic: when “the percentage change in quantity is less than the percentage change in price ( E < 1).” Examples: supply of land is inelastic; supply of pencils is elastic; demand for Parker ballpoint pens is elastic (because PaperMates are a close substitute); demand for table salt (which lacks a close substitute) is inelastic. Elasticity Is Independent of Units Elasticity measures percentage changes in variables, making comparisons among different goods easier. Example: a \$1 change in the price of a \$1,000 computer decreases quantity demanded from 10 to 9, and a \$1 increase in the price of a pen from \$1 to \$2 decreases quantity demanded from 10,000 to 9,999. Measured in units these situations look similar, but demand for computers in this case is elastic, and demand for pens is inelastic.
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Chapter 7 Notes - [ChapterSeven :Elasticities...

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