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Lecture 5

# Econ 103 Lecture 5 Jan 21st

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Simon Fraser University

Economics

ECON 103

Iryna Dudnyk

Winter

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Econ 103 Lecture 5 Jan. 21st
-Elasticity (E) = measures how responsive Q is to changes in M and P's.
-E > 0 => positive relationship
-E < 0 => negative relationship
-E = 0 => no response
-Large E => Q is "sensitive" (or responsive)
(Own-price) Elasticity of Demand (most commonly used)
E - by how many % Q demanded changes in response to 1% change in price.
Ex. 1:
-At Po = 5, Qo = 20
P1 = 7.50, Q1 = 5
Calculate Elasticity:
***** see notebook for graph ***** ( 1 )
-E = -75/+50
= -1.5 => for each 1% change in P, Q changes by 1.5%
Ex. 2:
- P = 5, Q = 20
- Firm knows E = -1.5
If firm increases P by 10% how many units will it sell?
% change Q = (-1.5) x (10) = -15%
15% out of 20 = 3
Q1 = 17 (P1 = 5.50)
Arc elasticity - use % change between 2 points.
-value depends on which point is initial.
*** use the following formula for exam:
E= ∆%Q/∆%P = (∆Q/∆P) x (Po/Qo)
E= (Q1-Qo/P1-Po) x (Po/Qo)
Point E - calculated for one point on D curve.
****** see notebook for graph ****** ( 2 )
Point E =(1/slope) x (P/Q) Own P elasticity is always negative, except when 0. (we will
often not use the negative sign, therefore 2 = -2)
=> use absolute value | E |
- if | E | > 1 => Elastic demand.
- ∆%Q/∆%P > 1 => ∆%Q > ∆%P
-> Q is "price-sensitive" ; small %∆P generates large % response in Q.
E = -5 P(up) 10%, Q(down) 50%
-| E | < 1 => Inelastic demand
E = -0.5
P(up) 10% Q(down) 5%
=> Q is not price sensitive.
-| E | = 1

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