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EC120 (343)
Chapter 5

Chapter 5 Price Elasticity

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Keith Diaz Chapter 5: Price Elasticity  Elasticity measures how much one variable responds to change sin another variable. It is a numerical measure of responsiveness of QD or QS to one of its determinants. Price Elasticity of Demand  % of change in QD / % change in P  % change: (end value – start value )/ midpoint value x 100  we use the midpoint value (average of the end and start values) so that it does not matter whether we move from A to B or B to A  Measures how much QD responds to a chance in price price-sensitivity of buyers’ demand  Along the demand curve, price and quantity demanded move in opposite directions, making price elasticity negative  ignore the negative sign Determinants of price elasticity 1. Substitutes: higher elasticity with close substitutes are available 2. Broadly or narrowly: narrowly defined goods have more substitutes than broadly defined ones 3. Luxury vs. necessity: luxury goods have higher elasticity as they are not necessary 4. Time: elasticity is higher in the long run than short run Variety of demand curves  The price elasticity of demand is closely related to the slope of the demand curve  but although the slope of a linear demand curve is constant, elasticity is not  elasticity increases with price because the slope is the ratio of changes in the 2 variables but the elasticity is the ratio of % changes  The flatter the curve, the larger the elasticity. The steeper the curve, the smaller the elasticity.  There is probably no good for which price elasticity of demand is 0  Inelastic demand. 0 the increase in revenue from higher P, so revenue falls.  Unit elastic demand. PED = 1  change in the price leads to a proportionate, opposite Policies 1. Interdiction: reducing supply - For inelastic goods, such as drugs (due to addiction), shifting the supply curve to the left only results in an increase in total spending because the fall in QD is less than the rise in price 2. Education - For inelastic goods, reduce the demand, shifting the deman
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