Textbook Notes
(363,452)

Canada
(158,372)

Ryerson University
(11,192)

Economics
(923)

ECN 104
(388)

Frank Trimnell
(39)

Chapter 5

# Chapter 5.docx

Unlock Document

Ryerson University

Economics

ECN 104

Frank Trimnell

Fall

Description

ECN – Chapter 5
Elasticity and its Application
The Elasticity of Demand
Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to
one of its determinants
The Price Elasticity of Demand and its Determinants
Price elasticity of demand: measures how much the quantity demanded responds to a
change in price
o Demand for a good is elastic if the quantity demanded responds substantially to
changes in price
o Demand is inelastic if the quantity demanded responds only slightly to changes in
price
Computing the Price Elasticity of Demand
Price elasticity of demand = …
Percentage change in quantity demand / Percent change in price
o A larger price elasticity implies greater responsiveness of quantity demanded to
price
Calculating percentage of change: (end – start value / start value) x 100%
Midpoint method:
o (End value – start value / midpoint) x 100% OR
o = (Q2 – Q1)/[(Q2 + Q1)/2] / (P2 – P1)/[(P2 + P1)/2]
The Determinants of Price Elasticity: A Summary
o Price elasticity of demand depends on:
The extent to which close substitute are available
Whether the good is a necessity/luxury
How broadly/narrowly the good is defined The time horizon – elasticity is higher in the long run than short run
The Variety of Demand Curve
Demand is elastic when elasticity is greater than 1
Inelastic when elasticity is less than 1
If the elasticity is exactly 1 (quantity moves the same amount proportionately as price),
demand is said to have unit elasticity
Price elasticity of demand is closely related to slope of the demand curve
*The flatter the demand curve that passes through a given point, the greater the price
elasticity of demand
*The steeper the demand curve that passes through a given point, the smaller the price
elasticity of demand
Tip: Inelastic curves look like the letter I and Elastic curves look like the letter E
Total Revenue and the Price Elasticity of Demand
Total revenue (in a market): the amount paid by buyers and received by sellers of a good
o Revenue = Price x Quantity
If demand is inelastic, then an increase in price causes an increase in total revenue

More
Less
Related notes for ECN 104