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# ch4 - Chapter 4 Elasticity OUTLINE Price elasticity of...

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Chapter 4 – Elasticity OUTLINE Price elasticity of demand ( η29 Determinants of η Elasticity and consumer spending o Exercises Cross price elasticity of demand Price elasticity of supply Tax incidence analysis Price elasticity of demand ( η29 Def’n: P % Q % P Q D D = = η in change % in change % percentages ensure that units of measurement have no effect on η . percentages are measured using the average price: P avg P P % = and quantity: D D D Q avg Q Q % = so that η is… …the same for a price rise as for a price fall ignore negative sign, treat η as a positive number Maria Gallego EC120 - Chapter 4 – Elasticity 1 of 11

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Price elasticity of demand ( η29 η along a linear demand curve A linear demand has …constant slope non-constant η . η > 1 at prices above mid-point η = 1 at mid-point η < 1 at prices below mid-point Classification of η η = 0 completely inelastic (vertical) η < 1 : inelastic η = 1 : unit elastic (rectangular hyperbola) η 1 elastic η = ∝ : infinitely elastic (horizontal) Example If P of gasoline goes up by 50% and Q D falls by 10% then P elasticity of D is 2 . 0 % 50 % 10 P % Q % D - = + - = = η but use 2 . 0 = η [elasticity given as positive number] D for gasoline is INelastic Maria Gallego EC120 - Chapter 4 – Elasticity 2 of 11
Determinants of η η depends on the ability & willingness of buyers to substitute between products.

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ch4 - Chapter 4 Elasticity OUTLINE Price elasticity of...

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