Mankiw Chapter 5 New

# Mankiw Chapter 5 New - Chapter5 Elasticity and its...

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Elasticity and its Application M icroeconomics P R I N C I P L E S   O F P R I N C I P L E S   O F N. Gregory Mankiw N. Gregory Mankiw Chapter 5

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Price Elasticity of Demand The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.
PRICE QUANTITY DEMANDED \$40 250 \$30 450 \$20 675 \$10 825

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Calculating Elasticity of Demand The numerator is the percentage change in quantity Quantity rises from 250 to 450 Change in quantity = 200 Average quantity = 350 % change in quantity = (200/350) x 100
The denominator is the percentage change in price Price falls from \$40 to \$30 Change in price = \$10 Average price = \$35 % change in price = (10/35) x 100 Elasticity = (200/350)/(10/35) = 2.0

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PRICE QUANTITY DEMANDED \$40 250 \$30 450 \$20 675 \$10 825
Price Quantity D P Q 1 1 P 2 Q 2 Inelastic Demand

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Price Quantity D P 1 P 2 Perfectly Inelastic Demand Q 1 Q 1 = Q 2
Price Quantity D P Q 1 1 P 2 Q 2 Elastic Demand

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Price Quantity D P 1 P 2 Perfectly Elastic Demand =
Expenditure = Price x Quantity

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Expenditure = Price x Quantity
Expenditure = Price x Quantity

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Impact of a Price Increase on Expenditure Inelastic Rises Elastic Falls Unit elastic Constant
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