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Chapter 5

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Economics

ECN 104

Frank Trimnell

Fall

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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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