MGEC31H3 Lecture : Elasticity
10 Aug 2010
School
Department
Course
Professor
Note on Elasticity
Elasticity definitions
D = elasticity of demand = percentage change in quantity demanded
percentage change in price
= [Qafter – Qbefore] / Qbefore = [Q/P]
[Pafter – Pbefore] / Pbefore [Q/P]before
• ignore the negative sign and just take the magnitude
• 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 = DS /[D+S] = D{S /[D+S]} = S{D /[D+S]}
situation
D S (exact) (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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