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Chapter 5

# ECON 1000 Chapter Notes - Chapter 5: Midpoint Method, Demand Curve, Ice Cream

Department
Economics
Course Code
ECON 1000
Professor
Troy Joseph
Chapter
5

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ECON 1000
CHAPTER 5: ELASTICITY AND ITS APPLICATION
Elasticity is a measure of how much buyers and sellers respond to changes in market
conditions.
The price elasticity of demand and its determinants
The law of demand states that a fall in the price of a good raises the quantity demanded. The
price elasticity of demand measures how much the quantity demanded responds to a change in
price. Demand for a good is said to be elastic if the quantity demanded responds substantially
to changes in the price. Demand is said to be inelastic if the quantity demanded responds only
slightly to changes in the price.
The price elasticity of demand for any good measures how willing consumers are to buy ;ess of
the good as its price rises.
Availability of close substitutes
Goods with close substitutes tend to have more elastic demand because it is easier for
consumers to switch from that good to others (example: butter and margarine). Less elastic
would be eggs.
Necessities versus luxuries
Necessities tend to have inelastic demands, whereas luxuries have elastic demands.
Definition of the market
The elasticity of demand in any market depends on how we draw the boundaries of the market.
Narrowly defined markets tend to have more elastic demand than broadly defined markets
because it is easier to find close substitutes for narrowly defined goods. For example, food, a
broad category, has a fairly inelastic demand because there are no good substitutes for food.
Ice cream, a more narrow category, has a more elastic demand because it is easy to substitute
other desserts.
Time horizon
Goods tend to have more elastic demand over longer time horizons. When the price of gasoline
rises, the quantity of gasoline demanded falls only slightly in the first few months. Over time,
people buy more fuel-efficient cars, switch to public transit, or move closer to where they work.
Computing the price elasticity of demand
Price elasticity of demand= percentage change in quantity demanded/ Percentage change in
price
Because the quantity demanded of a good is negatively related to its price, the percentage
change in quantity will always have the opposite sign as the percentage change in price.
However, we drop the negative in this course. With this convention, a larger price elasticity
implies a greater responsiveness of quantity demanded to changes in price.
The midpoint method: a better way to calculate percentage changes and elasticities
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