Textbook Notes (363,140)
Canada (158,217)
Economics (380)
ECO100Y5 (285)
Michael H O (131)
Chapter 4

ECO100Y5Y Chapter 4 Notes.docx

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University of Toronto Mississauga
Michael H O

Chapter 4 Notes - Demand is elastic when QD is responsive to change in price - Demand is inelastic when QD is unresponsive to change in price Measurement of Price Elasticity - It is usually better to know percentage change in prices of various products rather than fixed amount - Knowing the initial demand is also useful - Price Elasticity of Demand (ƞ); measure of responsiveness of QD to change in commodity’s price - ƞ = % change in QD new – old/average (new + old/2)/new – % change in price old/average (new + old/2) - Greater elasticity = largerƞ - This measure is called price elasticity of demand / demand elasticity Interpreting Numerical Elasticities - Increase in price associated with decrease in quantity - Demand elasticity is a negative number - Can vary from 0 to infinity - Elasticity is 0 when price leads to no change in QD (vertical demand curve) o Means consumers do not alter consumption when price changes - Elasticity < 1 = inelastic demand - Elasticity > 1 = elastic demand - Elasticity = 1 = unit elastic What Determines Elasticity of Demand? - Availability of substitutes and time period under consideration - Availability of Substitutes; o A change in price of products with prices of subs remaining constant can expect to cause substitution o A price drop = consumers buy more of product and less of substitutes o A price gain = consumers buy less of product and more of substitutes o Products with close subs have elastic demands o Products with no close subs have inelastic demands o Narrowly defined have more elastic demands - Short Run and Long Run; o Response to price change (the measured price elasticity) will be tend to be greater the longer the time span o Short Run demand curve shows immediate response of QD to change in price o Long Run demand curve shows response of QD to change in price after time has passed to switch or substitute products Elasticity and Total Expenditure - Total expenditure depends on price elasticity of demand - Total Expenditure = Price x Quantity - Change in total expenditure depends on relative changes in price and quantity - Elastic Demand = total expenditure rises - Inelastic Demand = total expenditure falls - Unit Elastic = total expenditure unchanged Price Elasticity of Supply - ƞs = % change in QS new – old/average (new + old/2)/new – % change in price old/average (new + old/2) - Elasticity > 1 = elastic supply - Elasticity < 1 = inelastic supply - If supply curve is vertical, QS does not change as price changes; Elasticity = 0 - If supply curve is horizontal, Infinite Elasticity of Supply What Determines Elasticity of Supply? - Substitution and Production Costs; o if cost of producing unit of output rise rapidly as output rises, response to a rise in price will quickly be choked off by increase in c
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