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Chapter 4

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ECON 1050
Eveline Adomait

Economics- Chapter 4: Elasticity Price Elasticity of Demand By how much does price and quantity increase or decrease? -Depends on the responsiveness of the quantity demanded to a change in price -What is meant by responsiveness?...slope We can compare the slopes of the demand curves, but we can’t always make a comparison because the slope depends on the units of price and quantity, which are usually unrelated Price Elasticity of Demand: Units free measurement of the responsiveness of the quantity demanded of a good to the change in its price, when all other influences remain the same  PED=------------------------------------  Minus Sign and Elasticity -When a price rises, the quantity demanded decreases because of a positive change in price brings a negative change in quantity demanded, so the PED is a negative number The magnitude tells us how elastic the PED is so we ignore the – sign Inelastic and Elastic Demand Elasticity PED Perfectly Inelastic 0 -Quantity demanded is consistent, no matter the price Inelastic -greater than 0, -Example: Insulin; doesn’t have a lot of substitutes; less than 1 usually a necessity Unitary 1 -% Change in quantity=%change in price Perfectly Elastic ∞ -the smallest increase in price causes an infinitely large decrease in demand Elastic Less than infinity-%Change in quantity is large and the %change in but greater than price is small 1 -Example: soft-drink; lots of substitutes- luxuries -elasticity and slope are related, but they are not the same Total Revenue and Elasticity -Total Revenue= price of a good X quantity sold -Total Revenue Test: method of estimating the PED by observing the change in total revenue that results from the change in price If price cut: -increases total revenue, demand is elastic -decreases total revenue, demand is inelastic -leaves revenues unchanged, demand is unitary Your Expenditure and Elasticity -When a price changes the change in your expenditure depends on your elasticity of demand Demand is: Elastic, expenditure increases Inelastic, expenditure decreases Unitary, expenditure stays the same Factors the Influence Elasticity -Closeness of Substitutes: The closer the substitute the more elastic the demand is for it  Oil is inelastic; metals are elastic  Necessities have an elastic demand -Proportion of Income Spent on Good: the greater the amount of income spent on good the more elastic the demand is for it -Time Elapsed Since Price Change: the longer the time spent since pr
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