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Unformatted text preview: Chapter 4 Elasticity OUTLINE Price elasticity of demand ( 29 Determinants of Elasticity and consumer spending o Exercises Cross price elasticity of demand Price elasticity of supply Tax incidence analysis Price elasticity of demand ( 29 Defn: P % Q % P Q D D = = in change % in change % percentages ensure that units of measurement have no effect on . percentages are measured using the average price: P avg P P % = and quantity: D D D Q avg Q Q % = so that is the same for a price rise as for a price fall ignore negative sign, treat as a positive number Maria Gallego EC120  Chapter 4 Elasticity 1 of 11 Price elasticity of demand ( 29 along a linear demand curve A linear demand has constant slope nonconstant . > 1 at prices above midpoint = 1 at midpoint < 1 at prices below midpoint Classification of = 0 completely inelastic (vertical) < 1 : inelastic = 1 : unit elastic (rectangular hyperbola) 1 elastic = : 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 . % 50 % 10 P % Q % D = + = = but use 2 . = [elasticity given as positive number] D for gasoline is INelastic Maria Gallego EC120  Chapter 4 Elasticity 2 of 11 Determinants of depends on the ability & willingness of buyers to substitute...
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This note was uploaded on 01/17/2012 for the course ECONOMICS 120 taught by Professor Mesta during the Fall '10 term at Wilfred Laurier University .
 Fall '10
 Mesta
 Price Elasticity

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