MGEC31H3 Lecture : Elasticity

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Note on Elasticity
Elasticity definitions
๎€D = elasticity of demand = percentage change in quantity demanded
percentage change in price
= [Qafter โ€“ Qbefore] / Qbefore = [๎€‚Q/๎€‚P]
[Pafter โ€“ Pbefore] / Pbefore [Q/P]before
โ€ข ignore the negative sign and just take the magnitude
โ€ข calculate with a small change in price, such as a $1 change
๎€S = elasticity of supply = percentage change in quantity supplied
percentage change in price
elasticity = 0 = completely inelastic = fixed
elasticity falls between 0 and 1 = inelastic
elasticity greater than 1 = elastic
elasticity ๎€ ๎€‚ = completely elastic = fully flexible = free
Joint elasticity approximation
๎€ = joint elasticity = ๎€D๎€S /[๎€D+๎€S] = ๎€ƒD{๎€S /[๎€D+๎€S]} = ๎€ƒS{๎€D /[๎€D+๎€S]}
situation
๎€ƒD ๎€ƒS ๎€ƒ (exact) ๎€ƒ (approx)
100
1
0.99
1
one elasticity
very large
(very flexible)
1
100
0.99
1
0.1
1
0.09
0.1
one elasticity
very small
(nearly fixed)
1
0.1
0.09
0.1
rule of thumb (expressed in two ways)
1) when one elasticity is much larger than the other (e.g. is ๎€‚), approximate the joint
elasticity with the smaller one
2) when one elastticity is much smaller than the other (e.g. is zero), approximate the joint
elasticity with the smaller one
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