ECO100Y5 Chapter Notes - Chapter 3: Price Elasticity Of Demand

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CHAPTER -ELASTICITY

SUMMARY

PRICE ELASTICITY OF DEMAND

• Price elasticity of demand is a measure of the extent to which the

quantity demanded of a product responds to a change in its price.

Represented by the symbol h, it is defined as

h=%change in quantity demanded / %change in price

• The percentage changes are usually calculated as the change divided

by the average value. Elasticity is defined to be a positive number,

and it can vary from zero to infinity. 

• When elasticity is less than 1, demand is inelastic—the percentage

change in quantity demanded is less than the percentage change in

price. When elasticity exceeds 1, demand is elastic—the

percentage change in quantity 

• demanded is greater than the percentage change in price.The main

determinant of demand elasticity is the availability of substitutes

for the product. Any one of a group of close substitutes will have a

more elastic demand than will the group as a whole.

• Items that have few substitutes in the short run tend to develop

many substitutes when consumers and producers have time to

adapt. Therefore, demand is more elastic in the long run than in the

short run.

• Elasticity and total expenditure are related. If elasticity is less than

1, total expenditure is positively related with price. If elasticity is

greater than 1, total expenditure is negatively related with price. If

elasticity is 1, total expenditure does not change as price changes

• PRICE ELASTICITY OF SUPPLY 

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Price elasticity of demand: price elasticity of demand is a measure of the extent to which the quantity demanded of a product responds to a change in its price. Represented by the symbol h, it is defined as h=%change in quantity demanded / %change in price: the percentage changes are usually calculated as the change divided by the average value. Elasticity is defined to be a positive number, and it can vary from zero to infinity: when elasticity is less than 1, demand is inelastic the percentage change in quantity demanded is less than the percentage change in price. When elasticity exceeds 1, demand is elastic the percentage change in quantity: demanded is greater than the percentage change in price. The main determinant of demand elasticity is the availability of substitutes for the product. Therefore, demand is more elastic in the long run than in the short run: elasticity and total expenditure are related.

Related Questions

Discussion #1

The law of demand states that a fall in the price of a good raises the quantity demanded, and the increase in price leads to a decrease in quantity demanded. The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price, and the percentage change in quantity demanded is greater than the percentage change in price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price, which indicates that the percentage in price is greater than the percentage in quantity demanded.

However, the extent of responsiveness of quantity demanded to a change in price depends on the nature of a particular good or service in the market. The price elasticity of demand partly depends on the availability of close substitutes. When a large number of substitutes are available, consumers respond to a higher price of a good by buying more of the substitute goods and less of the relatively more expensive good. In addition, goods or services that are considered necessities tend to have less elastic (more inelastic) demand, whereas goods or services that are considered luxuries have more elastic (less inelastic) demands.

Explain why the demand for the good or service provided by the organization you work for is elastic or inelastic. How does this influence pricing decisions?
Provide examples on how the availability of close substitutes affects price elasticity of demand.
Give specific examples of necessities or luxuries, and explain how they affect price elasticity of goods or services.

Please answer ALL bulletins and place the answers under the correct bulletin.

27. Which of the following statements is correct? a. The greater the price elasticity of demand, the more likely the product is a necessity. b. The greater the price elasticity of demand, the smaller the responsiveness of quanti demanded to price. The greater the price elasticity of demand, the greater the percentage change in price over the percentage change in quantity demanded. d. The greater the price elasticity of demand, the greater the responsiveness of quantity demanded to price.

If the percentage change in the quantity demanded of a good is less than the percentage change in price, the price elasticity of demand is:

A) Elastic

B) Inelastic

C) Perfectly inelastic

D) Unitary elastic

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ECO100Y5 Chapter Notes - Chapter 3: Price Elasticity Of Demand

ECO100Y5 Full Course Notes

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