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Unformatted text preview: ($) 6
5
4 D
A Elasticity of Demand
measures movements
along the demand curve,… B 3
2
1
0 Quantity
40 60 D NOT shifts in the curve.
120 Quantity EC101 DD & EE / Manove Elasticity of Demand p 20 So far we’ve seen that…
When the price rises, the quantity
demanded falls, and quantity supplied
increases.
But by how much will the quantity
demanded fall?
And by how much will the quantity supplied
rise? EC101 DD & EE / Manove Elasticity of Demand>Who Cares? p 21 Firms care:
 " if we raise the price of gas by $0.08/gallon, will this bring down our proﬁts, or will they go up?" Governments care:
 IN many countries: "if we want to cut teenage smoking by 50%, should cigarette taxe be increased by $.50 a pack?
by more? less? at all?
_marriage in india EC101 DD & EE / Manove Elasticity of Demand>Who Cares? p 22 Most important, your …
 mother cares…"by how much will my daughters bill drop if i make her pay half of it?
 how much less junk food will a kid eat if he has to pay for it? EC101 DD & EE / Manove Elasticity of Demand>Who Cares? p 23 To answer these questions, we have to
understand the concept of elasticity,…
…which measures the responsiveness of one
variable to another as a ratio of percentages.
We begin with the price elasticity of demand.
Sometimes we call it just the “elasticity of
demand.”
And sometimes the “elasticity of demand with
respect to the price.”
These three expressions mean the same thing.
EC101 DD & EE / Manove Elasticity of Demand>Who Cares p 24 Price Elasticity of Demand
The elasticity of demand tells us how sensitive
the quantity demanded is to the price.
More precisely, the elasticity of demand
defined by: is
“epsilon” Percentage Change in Quantity Demanded
Percentage Change in Price %Q
%P or equivalently by [ " change ", Q " quantity ", P " price "] EC101 DD & EE / Manove Elasticity of Demand>Definition p 25 Example: Cigarettes
Suppose that when the price of cigarettes
rises by 10%,…
the quantity of cigarettes demanded falls
by 5%.
Then the elasticity
of demand for
cigarettes is: =  5& ? 10% ? EC101 DD & EE / Manove Elasticity of Demand>Definition =  1/2 ? p 26 EC101 DD & EE / Manove Clicker Question p 27 EC101 DD & EE / Manove Clicker Question p 28 End of File EC101 DD & EE / Manove End of File p 29...
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 Fall '08
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