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Chapter 5

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ECN 104
Frank Trimnell

Alyssa Soubliere September 26, 2013 Ryerson University ECN104 Elasticity, Chapter 4 and 5 Notes Lecture4Notes Chapter 5—Elasticity and It’s Application Elasticity:  Basic Idea—elasticity measures how much one variable responds to changes in another variable o One type of elasticity measures how much demand for your websites will faill if you raise the price  Definition—elasticity is a numerical measure of the responsiveness of Q1 to Q2 Price Elasticity of Demand  Price elasticity of demand = Percentage change in Q^d / Percentage change in P o Example: Price elasticity of demand equals 15%/ 10% = 1.5  Elasticity is a unit free measure (look at absolute value) Calculating Percentage Changes:  Standard method of computing % change : (end value – start value) / start value * 100%  ∆P/P  Use the midpoint method: (end value – start value) / midpoint * 100% o This is the default method economists use to work out elasticity  250-200/225*100= 22.2%  (∆Q/Q) / (∆P/P  (∆Q/∆P) * P/Q  Lessons from Examples o It is easier to find substitutes for narrowly defined goods, there are fewer substitutes available for broadly defined goods o Price elasticity Is higher for luxuries than necessities o Price elasticity is higher in the long run than the short run The Variety of Demand Curves  The price elasticity of a demand is closely related to the slope of the demand curve  Rule of thumb: o The flatter the curve, the bigger the elasticity o The steeper the curve, the smaller the elasticity  The five different classifications of D(demand) curves… o “Perfectly inelastic demand” (extreme case)  D curve is vertical  Consumer price sensitivity is non  Elasticity is equal to 0 o “Inelastic Demand” Alyssa Soubliere September 26, 2013 Ryerson University ECN104 Elasticity, Chapter 4 and 5 Notes  D curve is relatively steep  Consumers price sensitivity is relatively low  Elasticity is >1 o “Unit Elastic Demand”  D curve: intermediate slope  Consumers price sensitivity: intermediate  Elasticity: 1 o “Elastic Demand”  D curve: relatively flat  Consumers price sensitivity: re
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