ECON 208 Chapter Notes - Chapter 4: Canada Pension Plan, Unemployment Benefits, Price Elasticity Of Demand

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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
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