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Chapter 4

Chapter 4- Prices, Equilibrium, and Elastcity.docx

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Kalina Staub

September 16, 2013 Chapter 4- Prices, Equilibrium, and Elasticity Elasticity- Measures the responsiveness of one variable to a change in another variable Slope (depends on units) is not equal to elasticity (unit free since it’s measured in percentage changes) Price Elasticity of Demand  Measure of the responsiveness of quantity demanded to a change in the commodity’s own price  Elastic- Buyers decision to purchase goods changed after price change (airline price)  Inelastic- Buyers decision to purchase goods does not cause a significant change after price change (salt) The Measurement of Price Elasticity  Both curves are drawn on the same scale  The slope of a demand curve tells us the amount by which price must change to cause a unit change in quantity demanded  Steeper demand curve has larger absolute slope  Initial equilibrium prices and quantities are the same  Larger absolute change is also the larger percentage change  It is more revealing to know the percentage change in the prices of various products  Knowing the quantity by which demand changes is not very revealing unless the initial level of demand is also known Price elasticity of demand coefficient (ED or PED or η) = Percentage change in QD (%∆ QD) Percentage change in price (%∆ P) Percentage change in QD= New QD- Old QD Percentage Change in Price= New P- Old P (New QD + Old QD)/2 (New P + Old P)/2 Interpreting Numerical Elasticises  Demand elasticity is negative but we ignore it and view it as positive  ANSWER WILL BE ABSOLUTE VALUE  Perfectly elastic demand- price is constant regardless of QD (horizontal) Es=infinity  Perfectly inelastic demand- quantity demanded is constant regardless of price (vertical) Es=0  If the Es >1 or < -1= Elastic If the 1>Es>0 = Inelastic If the Es =1 = Unitary September 16, 2013 ^Demand relatively more elastic than supply ^Demand relatively less elastic than supply Elastic Price Unitary Inelastic Quantity The same absolute change in Price and Quantity represent different percent changes along the curve; top = elastic, middle = unitary, and bottom = inelastic Determinates of Demand Elasticity  Availability of Substitutes  Close substitutes and narrowly defined products = Elastic demands September 16, 2013  No close substitutes and broadly defined products = inelastic demands  Time Horizon- Short Run and Long Run  Short run demand curve shows immediate response of quantity demanded to a change in price (inelastic)  Long run demand curve shows the response of quantity demanded to a change in price after enough time has passed to develop/ switch to substitute products (elastic) Elasticity and Total Expenditure  Total revenue = Price x Quantity Demanded (Calculated as Price x Quantity Sold: TR= P x Qs)  Elastic: TR= P ↑, TR ↓ or P ↓, TR ↑ Inelastic: price ↓= TR ↓ Unitary Elastic: Price ↑/↓, TR= same Price Elasticity of Supply  A measure of the responsiveness of quantity s/upplied to a change in the produ
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