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Chapter 5

Chapter 5 The Principles of Economics.docx

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Department
Economics
Course
ECO100Y1
Professor
James Pesando
Semester
Fall

Description
ECO100-Pesando-textbooknotes created by Lavender Y. Week 4 Elasticity: required readings chapter 5 Chapter 5 Elasticity and Application - Elasticity  Measure of responsiveness of quantity demanded or quantity supplied to one of its determinants - Price elasticity of demand  Measure of how much the Qd of a good responds to a change in P  Perfectly Elastic  Infinity  Horizontal  Elastic  > 1  If the Qd responds substantially to changes in P  Total revenue: increase in P – decrease in TR  Unit Elasticity  = 1  Total revenue: remain constant  Inelastic  < 1  If Qd responds slightly to change in P  Total revenue: increase in P – increase in TR  Perfect inelastic  = 0  Vertical demand curve  Determinates:  Availability of close substitutes ---- more substitutes, more elastic  Necessities (inelastic) vs. luxuries (elastic)  Definition of the market (food – ice cream – vanilla ice cream)  Time (more elastic over time)  % change in Qd / % change in P  (Q1-Q2) / [(Q1+Q2)/2] / (P1-P2)/ [(P1+P2)/2] - Income Edacity of Demand  % change in Qd / % change in Income  Positive --- normal goods: higher income raises Qd  Negative --- inferior goods: higher income lower Qd - Cross-Price Elasticity of Demand  Measure of how much Qd responds to change in P in another good  % Change in Qd1 / % change in P2  Substitutes --- positive  Complements --- negative - Elasticity of Supply  Depends on the flexibilit
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