CAS EC 101 Lecture Notes - Lecture 4: Demand Curve, Regional Policy Of The European Union, Laser Printing
1 May 2018
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CHAPTER 6: ELASTICITY
Introduction
ā¢ ex: which is more sensitive to changes in price?
o Option 1: the price of DVD players decreases by an average of 100 dollars per
item so the quantity of DVD players sold increases by 1 million units
o Option 2: the price of gasoline decreases by an average of 40 cents per gallon so
the quantity of gasoline sold increases by 200,000 units
ā¢ answer: there is no way to tell based on solely this information
Objective 1: Price Elasticity of Demand
ā¢ Price Elasticity of Demand ā a measure of how sensitive quantity demanded is to changes
in price
ā¢ Will always be negative (as the demand curve always slopes downwards)
ā¢ Defined as the percentage change in quantity demanded divided by the percentage change
in price
o Formula:
ā¢ ex1: when going from A to B, what is the price elasticity of demand? when going from B
to A, what is the price elasticity of demand?
o Answer (from A-B): ī¬ŗāī¬µī¬“
ī¬µī¬“ / ī¬øāī¬¶
ī¬¶ = -0.4
o Answer (from B-A): ī¬µī¬“āī¬ŗ
ī¬µī¬“ / ī¬¶āī¬ø
ī¬¶ = -1.33
o In order to solve the difference between the two answers we need to use the
Midpoint Formula (see objective 3)
Objective 2: Elastic and Inelastic Curves
ā¢ Inelastic Demand Curve ā when the absolute value of the price elasticity of demand is
less than 1
o Can be visually identified by a steep curve
āŖ The steeper the curve the more inelastic and less sensitive it is to changes
in price
o The quantity demand will not change very significantly due to a change in price
ā¢ Perfectly Inelastic Demand Curve ā when the demand curve is exactly vertical
o This means that there will always be one quantity demanded regardless of price
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o ex: insulin (regardless if the price increases or decreases, consumers who need
this medicine will continue to buy the same amount at whatever price in order to
live)
ā¢ Elastic Demand Curve ā when the absolute value of the price elasticity of demand is
greater than 1
o Can be visually identified by a flat curve
āŖ The flatter the curve the more elastic and more sensitive it is to changes in
price
o The quantity demand will change very significantly due to a change in price
ā¢ Perfectly Elastic Demand Curve ā when the demand curve is exactly horizontal
o This means that there will be several different quantities demanded although the
price does not shift
o ex: gasoline (regardless of the quantity bought by consumers, the price will stay
relatively the same unless changed by the producers
ā¢ Unit Elastic ā when the absolute value of the price elasticity of demand is equal to 1
Objective 3: Calculating Elasticity: The Midpoint Formula
ā¢ We need to convert these numbers into percentage changes in order to compare them
because different measurements are used and we need a commonality
ā¢ It is important to note that price elasticity will always be negative due to the downwards
sloping of the demand curve
o To counter this, we take the absolute value of this number when comparing ED
ā¢ Midpoint Formula ā essentially takes the average of both ED values
o When calculating ED we always use the midpoint formula
o Formula:
ā¢ ex1: when going from A to B, what is the price elasticity of demand? when going from B
to A, what is the price elasticity of demand?
o Answer (from A-B): ī¬ŗāī¬µī¬“
ī¬ŗ+ī¬µī¬“ / 2 / ī¬øāī¬¶
ī¬ø+ī¬¶ / 2 = -0.75
o Answer (from B-A): ī¬µī¬“āī¬ŗ
ī¬ŗ+ī¬µī¬“ / 2 / ī¬¶āī¬ø
ī¬ø+ī¬¶ / 2 = -0.75
Objective 4: Elasticity and Slope
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CAS EC 101 Full Course Notes
Verified Note
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Document Summary
Midpoint formula (see objective 3: in order to solve the difference between the two answers we need to use the. Objective 3: calculating elasticity: the midpoint formula: we need to convert these numbers into percentage changes in order to compare them because different measurements are used and we need a commonality. __ percent change in the price of good 2: formula: % (cid:2913)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2927)(cid:2931)a(cid:2924)(cid:2930)(cid:2919)(cid:2930)y (cid:2914)(cid:2915)(cid:2923)a(cid:2924)(cid:2914)(cid:2915)(cid:2914) (cid:2925)(cid:2916) (cid:2917)(cid:2925)(cid:2925)(cid:2914) (cid:2869) % (cid:2913)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2926)(cid:2928)(cid:2919)(cid:2913)(cid:2915) (cid:2925)(cid:2916) (cid:2917)(cid:2925)(cid:2925)(cid:2914) (cid:2870: substitute good. % (cid:2913)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2926)(cid:2928)(cid:2919)(cid:2913)(cid:2915) (cid:2925)(cid:2916) p(cid:2915)(cid:2926)(cid:2929)(cid:2919: cross-price elasticity of demand = % (cid:2913)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2927)(cid:2931)a(cid:2924)(cid:2930)(cid:2919)(cid:2930)y (cid:2914)(cid:2915)(cid:2923)a(cid:2924)(cid:2914)(cid:2915)(cid:2914) (cid:2925)(cid:2916) (cid:2887)(cid:2925)(cid:2921)(cid:2915) = (cid:2871)%(cid:2869)% = 3: cross-price elasticity of demand = % (cid:2913)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2927)(cid:2931)a(cid:2924)(cid:2930)(cid:2919)(cid:2930)y (cid:2914)(cid:2915)(cid:2923)a(cid:2924)(cid:2914)(cid:2915)(cid:2914) (cid:2925)(cid:2916) (cid:2922)a(cid:2929)(cid:2915)(cid:2928) (cid:2926)(cid:2928)(cid:2919)(cid:2924)(cid:2930)(cid:2915)(cid:2928)(cid:2929) % (cid:2913)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2926)(cid:2928)(cid:2919)(cid:2913)(cid:2915) (cid:2925)(cid:2916) (cid:2922)a(cid:2929)(cid:2915)(cid:2928) (cid:2926)(cid:2928)(cid:2919)(cid:2924)(cid:2930)(cid:2915)(cid:2928) (cid:2929)(cid:2925)(cid:2916)(cid:2930)wa(cid:2928)(cid:2915) % (cid:2913)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2919)(cid:2924)(cid:2913)(cid:2925)(cid:2923)(cid:2915: so we can conclude that for every 1% increase in consumers" incomes, quantity. = 2% demanded will go up by 2%
