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    Ch. 6 Notes

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    Emily Lau
    Elasticity measures how responsive economic variables are to changes in other variables. Price elasticity of demand measures how much quantity demanded responds to price changes. Demand can be elastic, inelastic, or unit-elastic depending on whether the percentage change in quantity demanded is greater than, less than, or equal to the percentage change in price. The elasticity of demand depends on factors like availability of substitutes, how the market is defined, and whether the good is a necessity or luxury. Supply elasticity also depends on factors like the ability of firms to change production quantities in response to price changes. Income elasticity measures responsiveness of quantity demanded to income changes and cross-price elasticity measures responsiveness to price changes of

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    Ch. 6 Notes

    Uploaded by

    Emily Lau
    48 views6 pages
    Elasticity measures how responsive economic variables are to changes in other variables. Price elasticity of demand measures how much quantity demanded responds to price changes. Demand can be elastic, inelastic, or unit-elastic depending on whether the percentage change in quantity demanded is greater than, less than, or equal to the percentage change in price. The elasticity of demand depends on factors like availability of substitutes, how the market is defined, and whether the good is a necessity or luxury. Supply elasticity also depends on factors like the ability of firms to change production quantities in response to price changes. Income elasticity measures responsiveness of quantity demanded to income changes and cross-price elasticity measures responsiveness to price changes of

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    Elasticity measures how responsive economic variables are to changes in other variables. Price elasticity of demand measures how much quantity demanded responds to price changes. Demand can be elastic, inelastic, or unit-elastic depending on whether the percentage change in quantity demanded is greater than, less than, or equal to the percentage change in price. The elasticity of demand depends on factors like availability of substitutes, how the market is defined, and whether the good is a necessity or luxury. Supply elasticity also depends on factors like the ability of firms to change production quantities in response to price changes. Income elasticity measures responsiveness of quantity demanded to income changes and cross-price elasticity measures responsiveness to price changes of

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    48 views6 pages

    Ch. 6 Notes

    Uploaded by

    Emily Lau
    Elasticity measures how responsive economic variables are to changes in other variables. Price elasticity of demand measures how much quantity demanded responds to price changes. Demand can be elastic, inelastic, or unit-elastic depending on whether the percentage change in quantity demanded is greater than, less than, or equal to the percentage change in price. The elasticity of demand depends on factors like availability of substitutes, how the market is defined, and whether the good is a necessity or luxury. Supply elasticity also depends on factors like the ability of firms to change production quantities in response to price changes. Income elasticity measures responsiveness of quantity demanded to income changes and cross-price elasticity measures responsiveness to price changes of

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    Ch.

    6- Elasticity: The Responsiveness of Demand and Supply

     Elasticity: measure of how much one economic variable responds to changes in another economic
    variable; sensitivity of Demand/Supply to change

    Price Elasticity of Demand: responsiveness in quantity demanded to a change in price

    % change in Qd
    Price Elasticity of Demand=
    % change in P

    Elastic/ Inelastic Demand


     Elastic demand: %age change in Qd > %age change in P;
     price elasticity is > 1 in absolute value

     Inelastic demand: %age change in Qd < %age change in P


     Price elasticity < 1 in absolute value

     Unit-elastic demand: %age change in Qd = %age change in P


     Price elasticity = 1 in absolute value

    Mid-Point Formula : use formula to ensure we have only one value of price elasticity of demand
    between same two points on D curve

    Price elasticity of demand=


    Variety of Demand Curve Elasticities
     Flatter curve -> bigger elasticity
     Steeper curve -> smaller “ “

    Perfectly Inelastic Demand (Extreme Case) Inelastic Demand

    D-curve: relatively steep


    D-curve: vertical C.P.S.: relatively low
    C.P.S: zero Elasticity < 1

    Unit-elastic Demand Perfectly Elastic Demand (other extreme)

    D-curve: intermediate slop D-curve: horizontal


    CPS: relatively high CPS: extreme
    Elasticity: 1 Elasticity: ∞
    Determinants of Price Elasticity of Demand
     Availability of close substitutes
    o Price elasticity is higher when close substitutes are available
     Breakfast cereal vs. Sunscreen
     Definition of the market
    o Price elasticity is higher for narrowly defined goods than broadly defined goods
     Blue jeans vs. clothing
     Luxuries versus necessities
    o Price elasticity is higher for luxuries than for necessities
     Insulin vs. Cruise
     Passage of Time
    o Price elasticity is higher in long run than short run
     Gasoline In short run vs. long run
     Xx Share of good in consumer’s budget
    o Price elasticity is higher in a larger share of the good in the average consumer’s budget

    Determinants of Price Elasticity of Supply


     ability/willingness of firms to alter quantity they produce as price increases
    o supply will be increasingly elastic in longer run
     products that require resources that are fixed in supply are exception
    o e.g. French winery rely on specific type of grape; if all the land on which that grape can be grown
    Is already planted in vineyards, supply of that wine will be inelastic even over a long period

    Elastic Demand Inelastic Demand

    Elasticity > 1 Elasticity > 1


    Variety of Supply Curve Elasticities

    Perfectly Inelastic Inelastic

    Elasticity = 0 Elasticity <1

    Unit-Elastic Perfectly Elastic

    Elasticity = 1 Elasticity = ∞
    Income Elasticity of Demand
     measures responsiveness of Qd to changes in income

    % ∆ Qd
    = Income elasticity of demand
    % ∆ Income

    Normal good Inferior good Income


    >0 <0
    Cross-Price Elasticity of Demand
     how quantity demanded of good 1 changes as price of good 2 changes
     percentage change in Qd of one good divided by the percentage change in the price of another
    good

    % ∆ Qd1
    = Cross-price elasticity of demand
    % ∆ P2

    Cross-Price Elasticity of Demand is…


    0 = not related
    >0 = substitute good
    <0 = complement good

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