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Chapter 4

Economics 101: Chapter 4

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ECON 101
Robert Gateman

Economics 101: Principles of Economics Chapter 4 4.1 Price Elasticity of Demand  Price elasticity of demand: how responsive Qd is to a change in price o Elastic: relatively responsive o Inelastic: relatively unresponsive Measurement of Price Elasticity:  Slope of the demand curves depicts how much Qd will change by   Average price eliminates the difference in the change in price (A to B, or B to A)   The negative sign of demand elasticity is ignored o E = 0 → price change does not change Qd o E < 1 → inelastic demand (price change causes little change in Qd) o E > 1 → elastic demand (price change causes increased change in Qd) o E = 1 → unit elastic (change in price is equal to change in Qd) Elasticity of Demand Determinants:  Mostly determined by the availability of substitutes and the given time period  A change in price of a product with lots of substitutes will have a greater impact on Qd o Elastic demand, close substitutes  Categories or sectors in a marketplace have fewer substitutes (change in price has little Qd effect) o Inelastic demand, fewer substitutes  Elasticity also heavily relies on the time period (short run, long run) o A product that is inelastic, may become elastic in the long run o Helpful to create two demand curves showing the short term and long term effects o Long run is often more elastic than the short run (time to adapt, innovate) Elasticity and Total Expenditure:  Total expenditure = price x quantity o Depends on the relative change in price and quantity 4.2 Price Elasticity of Supply  Price elasticity of supply: measures the responsiveness of Qs to a change in price    Supply curves have positive slopes and positive elasticity o S = 0 → completely inelastic supply (Qs does not change with price) o S < 1 → inelastic supply Economics 101: Principles of Economics o S > 1 → elastic supply o S = 1 → completely elastic (large change in Qs with change in price) Determinants of Supply Elasticity:  Substitution and p
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