Week 4 study guide

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Department
Economics for Management Studies
Course
MGEA02H3
Professor
Gordon Cleveland
Semester
Fall

Description
Chapter 4 Elasticity Notes 4.1 Price Elasticity of Demand N demand is said to be elastic when quantity demanded is quite responsive to changes in price N when quantity demanded is relatively unresponsive to changes in price, demand is said to be inelastic N the more responsive the quantity demanded is to changes in price, the less the change in equilibrium price and the greater the change in equilibrium quantity resulting from any given shift in the supply curve The Measurement of Price Elasticity N price elasticity of demand ( ) : measure of the responsiveness of quantity demanded to a change in the commoditys own price N = (percentage change in quantity demanded) (percentage change in price) N this measure is called the price elasticity of demand, or simply demand elasticity because the variable causing the change in quantity demanded is the products own price, the term own-price elasticity of demand is also used N the formula for price elasticity is then = (Q Q) ( p p) = (1Q Q0) Q) (1p 0p ) p) N inelastic demand : following a given percentage change in price, there is a smaller percentage change in quantity demanded; elasticity less than 1 N elastic demand : following a given percentage change in price, there is a greater percentage change in quantity demanded; elasticity greater than 1 What Determines Elasticity of Demand? N products with close substitutes tend to have elastic demands; products with no close substitutes tend to have inelastic demands N any one of a group of related products will have a more elastic demand than the group as a whole N the response to a price change, and thus the measured price elasticity of demand, will tend to be greater the longer the time span N the long-run demand for a product is more elastic than the short-run demand Elasticity and Total Expenditure N total expenditure = price quantity N the change in total expenditure depends on the relative percentage change in the price and quantity N if the percentage change in price exceeds the percentage change in quantity (elasticity less than 1), the price change will dominate, and total expenditure will change in the same direction as price changes N if the percentage change in price is less than the percentage change in quantity demanded (elasticity greater than 1), the quantity change will dominate, and total expenditure will change in the same direction as quantity changes N if the two per
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