# Ch05 - CHAPTER 5 ELASTICITY A MEASURE OF RESPONSIVENESS 1 2...

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CHAPTER 5 ELASTICITY: A MEASURE OF RESPONSIVENESS 1. Chapter Summary 2. Chapter Objectives 3. Chapter Outline Teaching Tips/Topics for Class Discussion 4. Extended Examples Extended Example 1:   Determinants of Elasticity Extended Example 2:   Reducing Gasoline Consumption 5. Problems And Discussion Questions 6. Model Answers to Questions:  Chapter Opening Questions Test Your Understanding Using the Tools 7. Economics Applied- Using What You’ve Learned 1. Chapter Summary  The price elasticity of demand measures the responsiveness of consumers to price changes. Price elasticity is calculated by dividing the percentage change in quantity demanded by the percentage change in price. Values greater than one indicate elastic demand; consumers change quantities demanded more than proportionately when prices change. Values less than one indicate inelastic demand; consumers change quantities demanded less than proportionately when prices change. Elasticity will be greater when there are many substitute products, when the good is important to the consumer’s budget, and when the time period considered is long. Price elasticity ranges from perfectly inelastic to unit elasticity to perfectly elastic. Along a linear demand curve, elasticity is greater than one above the midpoint and below one below the midpoint. Elasticity information tells firms whether price changes will increase or decrease total revenue; for an elastically demanded good, price increases reduce total revenue. If demand is inelastic, price increases increase total revenue. The price elasticity of supply is calculated similarly; supply is expected to be more elastic as the time period being considered increases. The Appendix presents explanations of income and cross (price) elasticity. 2. Chapter Objectives 1. How would a tax on beer affect the number of highway deaths among young adults? 2. Why is a bumper crop bad news for farmers? 3. Why do policies that limit the supply of illegal drugs increase the number of burglaries 49

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50 Chapter 5 and robberies? 4. If the population of a city increases by 9%, by how much will housing prices increase? 3. Chapter Outline I. The Price Elasticity of Demand 1. The price elasticity of demand measures the responsiveness of consumers to changes in price 2. Formula: E d = (% change in quantity demanded)/ (% change in price) Teaching Tips: Do not spend too much time on calculations Once through should be enough. It is much more important for students to understand why and what impact elasticity has than how to calculate it. A. Price Elasticity and the Demand Curve 1. If price elasticity of demand is greater than 1, demand is elastic . 2. If price elasticity of demand is less than 1, demand is
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Ch05 - CHAPTER 5 ELASTICITY A MEASURE OF RESPONSIVENESS 1 2...

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