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Chapter 4

Chapter 4 - Elasticity.docx

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University of Waterloo
ECON 101
Corey Van De Waal

Chapter 4 Elasticity Key terms and IdeasPrice elasticity of demandA unitsfree measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the sameFormula percentage change in quantity demandedpercentage change in price Percentage change is also the average Essentially DQDPDQDP In the exampleThe percentage change in quantity demanded DQ is calculated asDQQave x 100 which is 210 x 10020 The percentage change in price DP is calculated as DPPave x 100 which is 120 x 1005 By using average price and average quantity we get the same elasticity value regardless of whether the price rises or fallsSince elasticity is a unitsfree measure or a ratio of percentages a change in the units of measurement of pricequantity leaves the elasticity value the sameInelastic and Elastic DemandDemand can be inelastic unit elastic or elasticcan range from zero to infinityPerfectly inelastic demand o Quantity demanded doesnt change when the price changes the price elasticity of demand is zero o If the percentage change in quantity demanded is smaller than the percentage change in pricethe price elasticity of demand is lessthan 1 o Vertical demand curve
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