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

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28 Oct 2012

School

Department

Course

Professor

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