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Chapter 6 Elasticity: The Responsiveness of Demand and Supply
•
Elasticity
A measure of how much one economic variable responds to changes in
another economic variable
o
Ex. the responsiveness of the quantity demanded of a good to changes in its price
is called the
price elasticity of demand
o
The responsiveness of the quantity supplied of a good to changes in its price is
called the
price elasticity of supply
The Price Elasticity of Demand and its Measurement
•
Price elasticity of demand
the responsiveness of the quantity demanded to a change in
price, measured by dividing the percentage change in the quantity demanded of a product
by the percentage change in the product’s price
Measuring the Price Elasticity of Demand
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Economists use
percentage changes
when measuring the price of elasticity of demand
•
Price of demand= % change in Qd /
% change in P
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The price elasticity of demand is not the same as the slope of the demand curve
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The price elasticity of demand is always negative
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In comparing elasticities, we are usually interested in their relative size so we compare
their
absolute value
Elastic Demand and Inelastic Demand
•
Elastic demand
demand is elastic when the percentage change in quantity demanded is
greater
than the percentage change in price, so the price elasticity is
greater
than 1 in
absolute value
•
Inelastic demand
 demand is inelastic when the percentage change in quantity
demanded is
less
than the percentage change in price, so the price elasticity is
less
than 1
in absolute value
•
Unit
elastic demand
demand is unit elastic when the percentage change in quantity
demanded is
equal
to the percentage change in price, so the price elasticity is equal to 1
in absolute value
An Example of Computing Price Elasticities
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The steeper the demand curve
inelastic
Midpoint Formula
•
We can use the
midpoint formula
to ensure that we have only one value of the price
elasticity of demand between the same two points on a demand curve
•
The midpoint formula uses the
average
of the initial and final quantities and the initial
and final prices
•
Price elasticity of demand= (Q2Q1)/(Q1+Q2/2)
/
(P2P1)/(P1+P2/2)
When Demand Curves Intersect, the Flatter Curve is More Elastic
•
Elasticity is not the same thing as slope
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While slope is calculated using changes in quantity and price, elasticity is calculated
using percentage changes
Polar Cases of Perfectly Elastic and Perfectly Inelastic Demand
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This note was uploaded on 02/21/2012 for the course EC 101 taught by Professor Idson during the Fall '08 term at BU.
 Fall '08
 Idson

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