Chapter7 Additional Insights

Chapter7 Additional Insights - Chapter 7: Describing Supply...

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Chapter 7: Describing Supply and Demand: Elasticities This chapter is devoted to the concept, elasticity . In Chapters 4 and 5, we saw that the law of demand describes the inverse relationship between price and quantity demanded. We predict that a decrease in price will lead to an increase in the quantity demanded. The next question is “by how much will quantity demanded change in response to a change in price, ceteris paribus ?” Elasticity measures how sensitive a consumer is to price changes. We also learned that income can affect demand, as well as the price of another good(service). We are sometimes also interested in how much quantity demanded will change in response to a change in income or the price of another good, ceteris paribus. Similarly, we are sometime interested in by how much a producer will alter quantity supplied in response to a change in price. …Elasticity is a useful tool to economists that measures the sensitivity of buyer(s) or (seller(s) to a change in some monetary unit. On the demand side, we use three elasticities: o Price elasticity of demand – a measure of a buyer’s sensitivity to price changes. o Income elasticity of demand – a measure of a buyer’s sensitivity to income changes. o Cross-price elasticity – a measure of a buyer’s sensitivity to a change in the price of another good (such as a complement or a substitute). On the supply side, we usually use only the price elasticity of supply, which is a measure of a seller’s sensitivity to price changes. The general formula for elasticity is:
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This note was uploaded on 12/03/2011 for the course ECON 101 taught by Professor Smith during the Fall '11 term at North Shore Community College.

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Chapter7 Additional Insights - Chapter 7: Describing Supply...

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