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Unformatted text preview: Announcements Chapter 4 HW due tonight! Its long so give yourself time. Starting ch5 today. First exam 2 weeks from today. Chapter 5 Elasticity of Demand and Supply ELASTICITY elasticity A general concept used to quantify the response in one variable when another variable changes. B A B A = % % respect to with of elasticity Elasticity We know that a change in price leads to a change in quantity demanded and quantity supplied. But if price changes, by how much (in percentage terms) will quantity demanded change? By how much will quantity supplied change? Elasticity tells us this. But doesnt the slope of the demand or supply curve tell us this too? No! PRICE ELASTICITY OF DEMAND SLOPE AND ELASTICITY Slope Is Not a Useful Measure of Responsiveness PRICE ELASTICITY OF DEMAND price elasticity of demand The ratio of the percentage of change in quantity demanded to the percentage of change in price; measures the responsiveness of quantity demanded to changes in price. price in change % demanded quantity in change % demand of elasticity price = CALCULATING ELASTICITIES THE MIDPOINT FORMULA midpoint formula For a precise calculation of elasticity, we use the value halfway between P 1 and P 2 for the base in calculating the percentage change in price, and the value halfway between Q 1 and Q 2 as the base for calculating the percentage change in quantity demanded. 100% x 2 / ) ( demanded quantity in change demanded quantity in change % 2 1 Q Q + = 100% x 2 / ) ( 2 1 1 2 Q Q Q Q + = CALCULATING ELASTICITIES Using the point halfway between P 1 and P 2 as the base for calculating the percentage change in price, we get 100% x 2 / ) ( price in change price in change % 2 1 P P + = 100% x 2 / ) ( 2 1 1 2 P P P P + = A simple way to calculate elasticity: D D E P P P P Q Q Q Q P P P P Q Q Q Q P P P P Q Q Q Q E = + + = + + = + + = ) ( ) ( 2 / ) ( 2 / ) ( 100% x 2 / ) ( 100% x 2 / ) ( 2 1 1 2 2 1 1 2 2 1 1 2 2 1 1 2 2 1 1 2 2 1 1 2 PRICE ELASTICITY OF DEMAND...
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This note was uploaded on 12/06/2011 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.
 Fall '07
 Zirkle
 Economics

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