Principles of Microeconomics Notes Part 5 - 4.0ed this course!

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Department
Economics
Course Code
ECO 2023
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All

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ECO 2023 Module 5 04/07/2014 5.1 – The Elasticity of Demand Elasticity is a measure of responsiveness, always measured in percentage terms. Definition of elasticity­ a measure of the responsiveness of quantity demanded or quantity supplied to one  of its determinants. Price elasticity of demand measures the response of consumers to a change in price Price elasticity of demand­ a measure of how much the quantity demanded of a good  responds to a change in the price of that good, computed as the percentage change in  quantity demanded divided by the percentage change in price Price Elasticity of Demand and its Determinants Availability of Substitutes The greater availability of substitutes, the higher the price elasticity of demand Necessities vs. Luxuries Demand for necessitates, goods that are critical to our everyday life, is relatively elastic. Demand for luxury goods, goods we would like to have but are not likely to buy unless our income jumps or  the price declines sharply, is relatively elastic Definition of the market Narrowly defines markets (ice cream) have more elastic demand than broadly defined markets (food) Time Horizon The longer the time interval considered, or the longer the run, the more elastic is the good’s demand curve There are more substitutes in the long run than in the short run The long run provides more options for change The long­run price elasticity of demand is higher than the short­run elasticity.  This is due to consumers  making changes over the long­run that they couldn’t in the short­run Proportion of Income Spent of the Good (Relative Price) Demand for goods that represent a large proportion of one’s budget are more elastic than demand for  goods that represent a small proportion of one’s budget Goods that cost very little to your 
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