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Chapter 4

Chapter 4 - Elasticity.docx

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McGill University
Economics (Arts)
ECON 208
Mayssun El- Attar Vilalta

Chapter 4 – Elasticity Sept.19.12 Elasticity 1) PED - measure of how much demand changes when price changes - (% change in demand/% change in price) - negative value = inverse relationship between price and demand - elasticity is related to the slope of the demand curve but it isn’t exactly the same - range of values for PED: a. PED = 0: change in price has no effect on quantity demanded (perfectly inelastic, curve is perfectly vertical) b. PED = infinity: change in price causes demand to fall to zero (perfectly elastic, curve is perfectly horizontal) c. PED = <1 but >0: inelastic demand, negative steep curve, change in price leads to a smaller change in demand d. PED = >1 but < infinity: elastic demand, change in price leads to a change in demand, positive value = normal goods and negative value = inferior good, negative curve e. PED = 1: unit elastic demand, change in price leads to a proportionate and opposite change in demand, when price goes up a certain % demand goes down by the same amount, curve is a decreasing slope - low-priced goods products more inelastic demand than high-priced goods - determinants of PED: a. number and closeness of substitute goods (more substitutes = more elastic demand) b. necessity of the product and how widely the product is defined (food = inelastic, meat = inelastic), addictive goods = inelastic c. time period considered (short term = inelastic, long term = elastic) d. necessities/addiction vs. luxuries - ideal for the government to tax inelastic goods so demand doesn't fall and they make a revenue 2) XED - measure of how much demand changes when the price of another product changes - (% change in demand of product x/% change in price of product y) - range of values for XED: a. negative value (value < 0)= complimentary goods b. positive value (value > 0)= substitute goods c. value of 0 = unrelated goods - Cross elasticity of demand is a measure of the responsiveness of the demand for one good to a change in the price of another good. The sign of the XED is either positive (+) or negative (-). - % change in quantity demanded of x/ % change in quantity demanded of y - Positive XEDs For goods that are substitutes for one another, the relation is a positive one. This occurs when the demand for one good and the price of another changes in the same direction, i.e. when the price of one good goes up the demand of another good goes up as well. - Negative XEDs The cross elasticity of dem
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