Textbook Notes (367,893)
Canada (161,477)
Economics (385)
ECO100Y5 (290)
Chapter 4

Chapter 4- Prices, Equilibrium, and Elastcity.docx

4 Pages
160 Views
Unlock Document

Department
Economics
Course
ECO100Y5
Professor
Kalina Staub
Semester
Fall

Description
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
More Less

Related notes for ECO100Y5

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit