Textbook Notes (378,582)
CA (167,184)
UTSC (19,212)
MGEA02H3 (28)
Chapter 4

Chapter 4

7 Pages
147 Views

Department
Economics for Management Studies
Course Code
MGEA02H3
Professor
Gordon Cleveland

This preview shows pages 1-2. Sign up to view the full 7 pages of the document.
Chapter 4: Elasticity
The laws of demand and supply predict the direction of changes in equilibrium price and
quantity in response to various shifts in demand and supply.
4.1 PRICE ELASTICITY OF DEMAND
Demand is said to be elastic when quantity demanded is quite responsive to changes in
price. When quantity demanded is relatively unresponsive to change in price, demand is
said to be inelastic.
The more responsive the quantity demanded is to changes in price, the less the change in
equilibrium price and the greater the change in equilibrium quantity from any given
shifts in the supply curve.
The Measure of Price Elasticity
The slope of a demand curve tells us the amount by which price must change to cause a
unit change in quantity demanded.
If initial prices and quantities are the same in both cases, the larger absolute change is
also the larger percentage change.
The price elasticity of demand (demand elasticity) is a measure of the responsiveness of
quantity demanded to a change in the commoditys own price.
Equation: % change in quantity demanded / % change in price
The Use of Average Price and Quantity in Computing Elasticity
Changes in price and quantity are measured in terms of the average values of each
because averages avoid the ambiguity caused by the fact that when a price or quantity
changes, the change is a different percentage of the original value than it is of the new
value.
Using average values of price and quantity means that the measured elasticity demand
between any two points on the demand curve is pendent of whether the movement is
from 1 to 2 or 2 to 1.
Algebraic formulas: [(Q1 Q2) / average Q] / [(P1 P2) / average P]
www.notesolution.com
Unit free elasticity even though prices are measure in dollars and quantity of cheese is
measure in kilograms, the elasticity of demand has no units.
Interpreting Numerical Elasticities
Because demand curves have negative slopes, an increase in price is associated with a
decrease in quantity demanded, and vice versa.
Because the percentage changes in price and quantity have opposite signs, demand
elasticity is a negative number.
The more responsive the quantity demanded to a change in price, the greater the
elasticity and the larger is eta.
Vertical demand curve elasticity is zero when a change in price leads to no change in
quantity demanded.
Demand curve is very flat, almost horizontal elasticity is very large when even a very
small change in price leads to an enormous change in quantity demanded.
Elasticity less than 1 = inelastic demand
Elasticity greater than 1 = elastic demand
Elasticity equal to 1 = unit elastic
A negatively sloped linear demand curve does not have a constant elasticity, even though
it does have a constant slope.
A linear demand curve has a constant elasticity only when it is vertical or horizontal.
Nonlinear demand curve also has a constant elasticity.
What Determines Elasticity of Demand?
One of the main determinants of demand elasticity is the availability of substitutes.
A fall in the price leads consumers to buy more of the product and less of the substitutes,
and a rise in price leads consumers to buy less of the product and more of the
substitutes.
Products with close substitutes tend to have elastic demands; products with no close
substitutes tend to have inelastic demands.
www.notesolution.com

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
Chapter 4: Elasticity The laws of demand and supply predict the direction of changes in equilibrium price and quantity in response to various shifts in demand and supply. 4.1 PRICE ELASTICITY OF DEMAND Demand is said to be elastic when quantity demanded is quite responsive to changes in price. When quantity demanded is relatively unresponsive to change in price, demand is said to be inelastic. The more responsive the quantity demanded is to changes in price, the less the change in equilibrium price and the greater the change in equilibrium quantity from any given shifts in the supply curve. The Measure of Price Elasticity The slope of a demand curve tells us the amount by which price must change to cause a unit change in quantity demanded. If initial prices and quantities are the same in both cases, the larger absolute change is also the larger percentage change. The price elasticity of demand (demand elasticity) is a measure of the responsiveness of quantity demanded to a change in the commoditys own price. Equation: % change in quantity demanded % change in price The Use of Average Price and Quantity in Computing Elasticity Changes in price and quantity are measured in terms of the average values of each because averages avoid the ambiguity caused by the fact that when a price or quantity changes, the change is a different percentage of the original value than it is of the new value. Using average values of price and quantity means that the measured elasticity demand between any two points on the demand curve is pendent of whether the movement is from 1 to 2 or 2 to 1. Algebraic formulas: [(Q 1 ) 2average Q] [(P 1 ) 2average P] www.notesolution.com
More Less
Unlock Document


Only pages 1-2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Don't have an account?

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