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Chapter 4

ECON 1010H Chapter 4: Elasticity

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Department
Economics
Course
ECON 1010H
Professor
Mak Arvin
Semester
Winter

Description
Chapter 4 Elasticity Price elasticity of demand- is a unit free measure of the responsiveness of the quantity demanded of a good to a change in its price. Perfectly inelastic demand- if the quantity demanded remains constant when price changes.Examples include insulin. Unit elastic demand- when quantity demanded equals quantity supplied, the price elasticity equals 1 Inelastic demand- when the percentage change in demand is less than the percentage change in price. Easlistity is between 1 and zero and examples include food and shelter Perfectly elastic demand - when quantity demanded changes by an infinitely large percentage in response to a tiny change in price. Example, two soft drink machines with a slight difference in price. Elastic demand - when percentage change in quantity demanded exceed the percentage change in price. The factors that influence the Elasticity of Demand 1. The closeness of the substitute - the closer the substitute for a good, the more elastic is the demand for it. 2. The proportion of income spent on the good- the greater the proportion of income spend on a good, the more elastic is the demand for it 3. The time elapsed since the price change- the more time has elapsed since the price increase the more elastic it becomes. Total revenue test 1. If a price cut increases total revenue, demand is elastic 2. If price cut decreases total revenue, demand is inelastic 3. If price cut leaves total revenue unchanged, demand is unit elastic Income elasticity of Demand - is the measure of the responsiveness of the demand for a good or service to change in income. Positive and greater th
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