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Economics 1021A/B
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Arvin Dar
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Economics

Economics 1021A/B

Arvin Dar

Winter

Description

Topic 3: Elasticities
1. Introduction
2. Price elasticity of demandD(E )
2.1 Formula
2.2 Elasticity for an entire D curve
2.3 Elasticity for points along a straight line D curve
2.4 Relationship between ΔP and Δ in revenue under different elasticity values
2.5 Determinants of D
3. Price of elasticity of suppSy (E )
4. Income elasticity of demand (Y )
5. Cross (cross) elasticity of demanX (E )
1. Introduction
Elasticity shows the responsiveness/sensitivity of one variable to a change in another variable
o Q to a change in P
o Acceleration to a change in mass, etc.
o The responsiveness of quantity demanded when we change price
The changes are necessary to see responsiveness, but on their own are not enough to see the
change without knowing the numbers
o Change price by $-1 and ten more products are ordered
o Change may not be significant:
Annual number of orders: if you produce a million bags of coffee a year, then
no. But if you produce 10, then yes)
Original cost: if the product costs a million dollars or ten dollars, the $1 change
will vary in significance
Responsiveness of y to a change in x
o % Δ in Y = Δ Y x 100
Y = ΔY/ΔX
o % Δ in X = Δ X x 100
X
2. Price elasticity of demand (E ) D
Point elasticity measure
ED
Arc elasticity measure
2.1 Formula
The point you use to put things in perspective are the original cost and the original quantity you
started with We use the average of the old and new values to… something.
o P = $5 Q = 100
d
o P = $4 Q = 120
o ΔP = $1 ΔQ = +20
d d
o Point elasticity measure: E D ΔQ /ΔP ∙ P/Q
Original price & quantity demanded
ED= +20/-1 ∙ $5/100 = 100/-100 = -1
This value will always be negative
o Arc elasticity measure: E D ΔQ /ΔP ∙ P/Q d
ED= +20/-1 ∙ 4.5/110 = - 90/110
Use the average values of price and quantity demanded
Absolute value = ignore the negative sign – some text books do this
2.2 Elasticity for an entire D curve
Jargon Description Graph
Perfectly elastic E = - ∞ Demand is horizontal (ΔQ not P)
D d
Q is infinitely responsive
Slope: fairly flat
Elastic -∞ < E D-1 d
Between -1 and –infinity +P by 1 – Q falds by 10 (cross multiply – 10/1 = %delta
Qd/%delataP) Q is very responsive
Slope: negative curve (not pie)
Unit elastic E D -1
P=dC/Qd (P x corresponding Qd = C)
Q is equally responsive to a change in price
Inelastic -1 < ED< 0 (between -1 & 0) Slope: fairly steep
d
Q is not very responsive – things like gas & necessities
Perfectly inelastic E D 0 Demand is perfectly vertical (ΔP not Q )
Quantity demanded does not change. It’s stuck at one point
A typical demand curve slopes downward (like unit or in/elastic)– perfectly in/elastic are strange
examples
2.3 Elasticity for points along a straight line D curve
Picking a point on a curve and seeing if the point is elastic or inelastic
Use the point measure
Slope = Δy/Δx = -2
Flip the axis = -.5
o Y = 5 – 2x 2x = 5 – y x = 5/2 – 1/2y x = 2.5 – ½ y
d
While sitting on the Y axis (P), the coordinate for Q is 0 ( ½ times #/0)
o Anything divided by zero gives you (-)infinity
While sitting on the X axis (Qd) the coordinate for P is 0 ( ½ times 0/#)

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