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Chapter 5

Chapter 5

5 Pages
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Department
Economics
Course Code
ECN 104
Professor
Eric Kam

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Chapter 5
Key
termsdescription
Elasticity
Change / difference
Somme
QdQuantity demanded
QSQuantity supplied
PPrice
YIncome
Elasticity: a measure of the responsiveness of quantity demanded or quantity
supplied to one of its determinants
ELASTICITY OF DEMAND
Price elasticity of demand: measures how much the quantity demanded responds to
changes in the price
= Qd /((Qd)/2)
P/((P)/2)
Classification of elasticity:
oWhen elasticity is greater than 1: total revenue rises as price rises; elastic
oWhen elasticity is smaller than 1: total revenue falls as price rises; inelastic
oWhen elasticity is equal to 1: it is said to have unit elasticity.
Constant changes in price and Qs or Qd
Determinants of price elasticity:
oAvailability of close substitutes: the more close substitutes a good has, the more
elastic is its demand
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oNecessities vs Luxuries: Necessities tend to have small income elasticities (price
inelastic), while luxuries tend to have large income elasticities (elastic demand).
oDefinition of the market: narrowly/specific defined markets have more elastic
demand than broadly defined markets.
oTime Horizon: goods tend to have more elastic demand over long periods of time
Total revenue: Amount paid by buyers and received by sellers of a good (Revenue = P
* Qd)
Inelastic Percentage change in price is greater than the percentage change in Quantity
demanded
If price rises, Quantity demanded falls, revenue will rise
If price falls, quantity demanded rises, revenue will fall
Elastic Percentage change in price is lower than percentage change in Quantity
demanded
If price rises, Quantity demanded falls, revenue
will fall
If price falls, Quantity demanded rises, revenue will rise
oUnit elastic percentage change in price is equal to percentage change in
Quantity demanded
Total revenue will remain the same; no matter the change in price
ELASCITY OF SUPPLY
Price elasticity of supply: measures how much the quantity supplied responds to
changes in the prices
= QS /((QS)/2)
P/((P)/2)
Determinants of price elasticity of supply
Qd
negatively related
Qd
positively related
to revenue
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Description
Chapter 5 Key description terms Elasticity Change / difference Somme Qd Quantity demanded QS Quantity supplied P Price Y Income Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants ELASTICITY OF DEMAND • Price elasticity of demand: measures how much the quantity demanded responds to changes in the price = Q /((Q )/2) P/((P)/2) • Classification of elasticity: o When elasticity is greater than 1: total revenue rises as price rises; elastic o When elasticity is smaller than 1: total revenue falls as price rises; inelastic o When elasticity is equal to 1: it is said to have unit elasticity. Constant changes in price and Qs or Qd • Determinants of price elasticity: o Availability of close substitutes: the more close substitutes a good has, the more elastic is its demand www.notesolution.com o Necessities vs Luxuries: Necessities tend to have small income elasticities (price inelastic), while luxuries tend to have large income elasticities (elastic demand). o Definition of the market: narrowly/specific defined markets have more elastic demand than broadly defined markets. o Time Horizon: goods tend to have more elastic demand over long periods of time • Total revenue: Amount paid by buyers and received by sellers of a good (Revenue = P * Q ) Inelastic Percentage change in price is greater than the percentage change in Quantity demanded Q negatively related If price rises, Quantity demanded falls, revenue will rise If price falls, quantity demanded rises, revenue will fall Elastic Percentage change in price is lower than percentage change in Quantity demanded
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