Textbook Notes (362,815)
Canada (158,059)
Economics (923)
ECN 104 (388)
Eric Kam (21)
Chapter 5

Chapter 5

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Ryerson University
ECN 104
Eric Kam

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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