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Notes_for_Chapter_4.doc

7 Pages
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Department
Economics
Course Code
ECON 103
Professor
Vera Lantinova

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Fraser International College ECON1034 “Principles of Microeconomics” Chapter 4: Elasticity The KEY concepts of this chapter are: - A slope of a straight line - Elasticity of demand (interpretation, types) - Elasticity of supply (interpretation) - Factors that affect elasticity Before studying elasticity, it is useful to recall what the slope of a straight line is and how to find it: Elasticity is a property of demand and supply. If demand or supply are said to be elastic, it means That percentage change in Qd or Qs is greater than percentage change in price. Based on Luxuries commodities. If demand or supply are said to be inelastic, it means that percentage change in Qs or Qd is less than percentage change in price. Based on Necessities commodities. • Elasticity is independent of the units of measurement. This is useful because 1 Let’s illustrate elastic and inelastic demand and supply with diagrams: Elasticity of demand Price elasticity of demand Definition: It is a unites-free measurement of the responsiveness of percentage change in Qd / percentage change in price. PED refers to responsiveness of change in Qd of a good due to change in its own price. Inelastic means:Percenatge chage in Qd is less than price. Elastic means:Percenatge change in Qd is greater than price. The formula: % change in Qd (Divided by) % change in P Example: 2 The range of demand elasticity: Elasicty Range Elastic Greater than 1 Inealsric Less than1 Unitary Elastic Equal to 1 Perfectly Inelatic Equal to 0 Perfectly Elastic Equal to Infinity. Elasticity and slope: Firm’s revenue and elasticity Elastic Price Effect on Revenue Increase Decrease Decrese Increase Inelastic 3 Price Effect on Revenue Dectrease in Decrease inctrease in increase. Factors that affect the elasticity of demand: Factors Elastic/Inelastic More Substitute Avaiable Elastic Degree of Necessity If more than Inelastic % Income consumer spend If High propotion than Elastic IHabitual Consuption Inealstic Off pEak hours Elast
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