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Lecture 4

Economics 1021A/B Lecture Notes - Lecture 4: Normal Good, Inferior Good, Luxury Goods


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Lecture
4

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Chapter 4: Elasticity
Supply decreases = equilibrium price rises, equilibrium quantity rises
Price elasticity of demand
oUnits-free measure of the responsiveness of the quantity demanded of a good to a
change in its price when all other influences on buying plans remain the same
Price elasticity of demand =
percentage changequantity demanded
percentage changeprice
We express the change in price as a percentage of the average price and the change in
quantity demanded as a percentage of the average quantity
Elasticity – ratio of two percentage changes
Elasticity = unit free measure because the percentage change in each variable is
independent of the units in which the variable is measured
oRatio of two percentages is a number without units
Price of good rises = quantity demanded decreases
oPositive change in price = negative change in quantity demanded
oPrice elasticity of demand is a negative number
oMagnitude = absolute value
Tells us how responsive the quantity demanded is
If quantity demanded = constant when price changes
oThen price elasticity of demand is zero
oGood is said to have a perfectly inelastic demand
Unit elastic demand
oIf percentage change in the quantity demanded equals the percentage change in
the price
oThen the price elasticity equals 1
General case, between perfectly inelastic demand and unit elastic demand
oPercentage change in the quantity demanded is less than the percentage change in
the price
oPrice elasticity of demand is between 0 and 1 and the good is said to have an
inelastic demand
oFood and shelter = examples of inelastic demand
If quantity demand changes by an infinitely large percentage in response to a tiny price
change, then the price elasticity of demand is infinity and the good is said to have a
perfectly elastic demand
Demand for good that has a perfect substitute is perfectly elastic
Factors that influence the elasticity of demand
Closeness of substitutes
oCloser the substitutes for a good, the more elastic the demand for it
oOil has no substitutes so the demand for oil = inelastic
Proportion of income spent on the good
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