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ECON 1B03 (303)
Chapter 5

Chapter 5

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Department
Economics
Course
ECON 1B03
Professor
Usman Hannan
Semester
Fall

Description
CHAPTER 5: ELASTICITY AND ITS APPLICATION - elasticity: a measure of how much buyers and sellers respond to changes in market conditions - direction and magnitude The Elasticity of Demand The Price Elasticity of Demand and Its Determinants - price elasticity of demand: measures how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price - elastic if the quantity demanded responds substantially to changes in the price, inelastic otherwise Availability of Close Substitutes - goods with close substitutes have an elastic demand because it is easy to switch over Necessities v. Luxuries - necessities have inelastic demands, luxuries have elastic demands Definition of the Market - how to you draw the boundaries of the market - narrowly defined markets are more elastic because it is easy to find substitutes of narrowly defined goods (i.e. ice cream), broadly defined markets are more inelastic (i.e. food) Time Horizon - more elastic demand over longer time horizons Computing the Price Elasticity of Demand - price elasticity of demand = % change in quantity demanded / % change in price - report as positive numbers Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities - on a graph to find the elasticity > (A-B)/(midpoint of A and B) x 100 - gives you the same answer regardless of the direction of change The Variety of Demand Curves - demand is elastic when greater than 1, or unit elasticity at exactly 1 - closely related to the slope of the demand curve (i.e. flatter line at that point = greater price elasticity) - perfectly inelastic when elasticity is 0 (demand curve is vertical) - perfectly elastic when the curve is horizon
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