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Lecture 5

Lecture Five: Elasticity

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Department
Economics
Course
ECON 1000
Professor
George Georgopoulos
Semester
Fall

Description
Lecture Five: Elasticity September 27, 2011 Introduction to Elasticity If the demand curve is flat, the price is very elastic. If the demand curve is very steep, the price is inelastic. An elastic product would mean that a change in the price would bring on a large change in the demand of the product. An inelastic product would mean that a change in price would not affect the amount demanded of the product. Elastic goods are ones that have many substitutes, or are not necessities. Inelastic goods are ones that do not have any substitutes, or are considered to be necessities. Price Elasticity of Demand For a steep demand curve, an increase in supply would bring about a large fall in the price and only a small increase in the quantity demanded. For a flatter demand curve, the same increase in supply would bring a smaller fall in the price with a large increase in the quantity demanded. Total revenue = price x quantity (this is important to keep in mind when determining whether to increase the supply of a given good. The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers plans remain the same. Calculating Elasticity The formula is : % change in the quantity demanded divided by the % change in the price. The numerator is the quantity and the denominator is the price, To calculate the price elasticity of demand: We express the change in the price as a percentage of the average prices - the average of the initial and new price. We express the change in the quantity demanded as a percentage of the average quant
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