Textbook Notes (369,138)
Economics (326)
ECON 110 (199)
Chapter 4

# Chapter 4 notes.docx

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Department
Economics
Course Code
ECON 110
Professor
Ian James Cromb

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Chapter 4: Elasticity Price Elasticity of Demand  Def: A measure of the responsiveness of quantity demanded to a price change o η =  Demand is said to be elastic when quantity demanded is quite responsive to price changes o Price change severely effects the market equilibrium  Inelastic when quantity demanded is relatively unresponsive to price changes o Price change does not severely affect the market equilibrium The Measurement of Price Elasticity  The measurement of an increase can be very subjective unless you know the former quantity demanded  an increase of 75000 units may be impressive, but not if the former quantity was 1 million units. The Use of Average Price and Quantity in Computing Elasticity  Averages are used to avoid the ambiguity caused by the fact that when a price or quantity changes, the change is a different percentage of the original price.  η = Interpreting Numerical Elasticity’s  Because demand curves have negative slopes, an increase is associated with a decrease in quantity demanded, and vice versa  Because the percentage changes in price and quantity have opposite signs, the demand elasticity is a negative number  Use absolute value o Elasticity = 0 if change in price leads to no change in the quantity demanded  in this case, the demand curve would be a vertical/near vertical line  Indicates that consumers do not alter consumption when price rises = rare o Elasticity is large if even the smallest increase in price enormously changes the Gen beewlyenn quantity demanded  in this instance the demand curve would look flat  Inelastic Demand: Following a given percentage change in price, there is a smaller percentage change in quantity demanded; elasticity < 1  Elastic Demand: Following a given percentage change in price, there is a greater percentage change in quantity demanded; elasticity > 1 o Demand curves generally do not have the same elasticity over its whole length, even though it may have a constant slope What Determines Elasticity of Demand?  Mostly determined by the availability of substitutes and the time period in consideration Availability of Substitutes  A increase in price of a product, with no change in substitute products, will lead to consumers wanting less of that product and more of the substitutes - & vice versa  Products that are more broadly defined (food products, clothing products) may have fewer satisfactory substitutes – a rise in price may not effect it as much as narrowly defined products Short Run and Long Run  Because it takes time to develop a satisfactory substitute, a demand that is inelastic in the short run, may become elastic as time passes  The response to a price change, and thus the measured price elasticity of demand, will tend to be greater the longer the time span  Short Run Demand Curve: Shows immediate response of quantity demanded to a change in price given the current stock of durable goods  Long Run Demand Curve: Shows the response of quantity demanded to a price change after enough time has passed to change the stock of durable goods Elasticity and Total Expenditure  The response of total expenditure depends on the price elasticity of demand o Total Expenditure = Price x Quantity  Because P & Q move in opposite direction along the curve, one falling when the other rises, the change in total expenditure is ambiguous if all we know about the demand curve is that it has a negative slope o The change in total expenditure depends on the relative changes in P & Q  If P’s increase < Q’s increase, total expenditure will rise  If P’s increase > Q’s increase, total expenditure will fall  If P’s increase = Q’s increase, total expenditure stays the same Price Elasticity of Supply  Def: A measure of the responsiveness of quantity supplied to a charge in the product’s own price  η , η = ⁄ s = s ⁄  If curve is vert
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