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# Econ 4.docx

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York University

Economics

ECON 1000

George Georgopoulos

Fall

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Ch. 4: Elasticity
Elasticity of demand
price elasticity of demand: unit-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
⁄
o ⁄
Percentages and proportions
unit-free measure
magnitude, no positive/negative values
Elastic demand: percentage change in quantity demanded is greater than the percentage
change in price. elasticity > 1
Inelastic demand: percentage change in quantity demanded is less than the percentage change
in price. elasticity = between 0 and 1
Perfectly inelastic demand: quantity demanded remains constant when price changes.
elasticity = 0 (vertical line)
Unit elastic demand: percentage change in quantity demanded equals the percentage change in
price. elasticity = 1
Perfectly elastic demand: quantity demanded changes by an infinitely large percentage in
response to a tiny price change. elastic∞ty(horizontal line)
Elasticity along a straight-line demand curve
at midpoint: unit elastic
above midpoint: elastic
below midpoint: inelastic
total revenue: price of good multiplied by the quantity sold
o If demand is elastic, a 1% price cut increases quantity sold by more than 1% and total
revenue increases
o If demand is inelastic, a 1% price cut increases quantity sold by less than 1% and total
revenue decreases
o If demand is unit elastic, a 1% price cut increases quantity sold by 1% and total revenue
does not change total revenue test: method of estimating the price elasticity of demand by observing the change
in total revenue that results from a change in the price
Expenditures
o If your demand is elastic, a 1% price cut increases the quantity you buy by more than 1%
and your expenditures on the item increases
o If you demand is inelastic, a 1% price cut increases the quantity you buy by less than 1%
and your expenditures on the item decreases
o If your demand is unit elastic a 1% price cut increases the quantity you buy by 1% and
your expenditures on the item does not change
Factors that influence the elasticity of demand
o closeness of substitutes
the closer the substitutes for a good/service, the more elastic the demand is
necessities are inelastic
luxuries are elastic
o proportion of income spent on the good
the greater the proportion of income spent

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