econ chapter 5

econ chapter 5 - Chapter 5 Elasticity Price Elasticity of...

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Chapter 5: Elasticity Price Elasticity of Demand Elasticity: measures the sensitivity of one market variable to another Price elasticity of demand: measures the sensitivity of quantity demanded to the price of the good itself Measure it by the slope or steepness Flatter the demand curve- greater sensitivity A. Problems with Slope 1. Slope depends on the units of measurement 2. Slope doesn’t tell us about the significance of a change in price or quantity B. Elasticity Approach price elasticity of a demand (Ed) for a good is the percentage change in quantity demanded divided by the percentage change in price: Ed= % change in Qd/ % change in Price price elasticity of demand tells us the percentage change in uantity demanded for each 1 % change in price the greater the elasticity value. The more sensitive quantity demanded to price C. Calculating Price Elasticity when determining elasticity, we calculate the percentage change in variable using the midpoint formula: the change in the variable divided by the average of the old and new values. % change in price= (P1-P0)/ [(P1+P0)/2] % change in Qd: (Q1-Qo) / [Q1+Qo)/2] ex: ( 125)

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D. Categorizing Demand graphs (126) Perfectly inelastic Demand: Price elasticity of demand = 0 Inelastic Demand: price elasticity of demand between 0 and 1 Elastic Demand: price elasticity of demand greater than 1
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