Class Notes (1,100,000)

CA (640,000)

Western (60,000)

ECON (1,000)

ECON 1021A/B (500)

Michael Parkin (90)

Lecture 4

This

**preview**shows half of the first page. to view the full**3 pages of the document.**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 change∈quantity demanded

percentage change∈price

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

###### You're Reading a Preview

Unlock to view full version