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Chapter 5

Chapter 5 Economics.docx

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Economics 10a
Gregory Mankiw

Chapter 5 Economics • Elasticity is a measure of how much buyers and sellers respond to market conditions, specially quantity demanded or quantity supplied • Price elasticity of demand: a measure of how the quantity demanded of a good responds to price change o Demand is elastic if the quantity demanded responds substantially to price change o Demand is inelastic if the quantity demanded responds only slightly to changes in price • Influences of price elasticity of demand: o Availability of close substitutes: goods with close substitutes are more elastic because consumers can switch between the substitutes o Necessities=inelastic demands vs. Luxuries=elastic demands  Role as a necessity or a luxury depends on the buyer o Definition of the Market:  Narrowly defined markets have more elastic demandit is easier to find close substitutes for narrowly defined goods  Broadly defined markets have less elastic demand o Time horizon: Goods have more elastic demand over longer time horizons • o If the elasticity calculated is 2, that means that the change in quantity demanded is proportionately twice as large as the change in the price o The quantity demanded of a good is negatively related to its price (possess opposite signs) • Midpoint method for calculating elasticities: • Demand=elastic when elasticity>1 (quantity moves proportionally more than the price) • Demand=inelastic when elasticity<1 (quantity moves proportionally less than the price) • Demand=Unit Elasticity=1 (quantity moves the same amount proportionally as the price) • The flatter the demand curve that passes through a point, the greater the price elasticity of demand • The steeper the demand curve that passes through a given point, the smaller the price elasticity of demand • Total revenue: P  Sold the amount paid by buyers and the amount received by sellers of a good o The impact of price change on total revenue depends on elasticity of demand  Inelastic demand: Price  leads to a  in proportionally smaller quantity demanded; revenue   Elastic demand: Price  leads to a  in proportionally larg
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