Textbook Notes (363,559)
Canada (158,426)
Economics (727)
ECON 1B03 (302)
Chapter 5

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McMaster University
Hannah Holmes

Chapter Five: Elasticity and Its Application Basic Idea: Elasticity measures how much one variable responds to changes in another variable  One type of elasticity measures how much demand for your website will fall if you raise your price Elasticity: is a numerical measure of the responsiveness of Qd or Qs to one of its determinants Price Elasticity of Demand Price Elasticity of Demand: measures how much Qd responds to a change in P  Loosely speaking, it measures the price-sensitivity of buyers’ demand  Along a D curve, P and Q move in opposite directions, which would make price elasticity negative  Drop the minus sign and report all price elasticities as positive numbers!!!! Calculating Percentage Changes Standard method of computing the percentage (%) change: So, Instead we use the Midpoint Method:  The midpoint is the number halfway between the start and end values, the average of those values  It doesn’t matter which value you use as the “start” and which as the “end” The Determinants of Price Elasticity: The price elasticity of demand depends on:  The extent to which close substitutes are available  Whether the good is a necessity or a luxury  How broadly or narrowly the good is defined  The time horizon – elasticity is higher in the long run than the short run The Variety of Demand Curves  the price elasticity of demand is closely related to the slope of the demand curve Rule of Thumb:  the flatter the curve, the bigger the elasticity  the steeper the curve, the smaller the elasticity Five Different Classifications of D curves: 1) 2) 3) 4) 5) Price Elasticity and Total Revenue If you raise your price from $200 to $250, would your revenue rise or fall? Revenue = P x Q A price increase has two effects on revenue:  Higher P means more revenue on each unit you sell  But you sell fewer units (lower Q) due to Law of Demand Which of these two effects is bigger? It depends on the price elasticity of demand Price Elasticity and Total Revenue  If demand is elastic, then price e
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