Department

EconomicsCourse Code

ECO2023Professor

John SlatteryChapter

6This

**preview**shows half of the first page. to view the full**3 pages of the document.**Chapter 6 Elasticity: The Responsiveness of Demand and Supply

• Elasticity is used to measure how one economic variable responds to changes in another

economic variable.

o Knowing price elasticity of demand allows you to compute the effect of a price change

on the quantity demanded

o Price elasticity of supply – The responsiveness of quantity supplied of a good to change

in its price

• 6.1 The Price Elasticity of Demand and Its Measurement

o Price of elasticity of demand- the measure of the responsiveness of the quantity

demanded to a change in price.

o Measuring the Price Elasticity of Demand

▪ Using the slope of the demand curve, telling how much quantity changes as

price changes

▪ Value computed for slope can change dramatically, depending on units used for

quantity and price.

• use percentage changes

• Price elasticity of demand = (Percentage in quantity demanded)/

(Percentage change in price)

• Price elasticity of demand is not the same as the slope of the demand

curve

• Price elasticity of demand is always negative

o -3 is larger than -2 in economics

o Elastic Demand and Inelastic Demand

▪ Elastic Demand – when the percentage change in quantity demand is greater

than percentage change in price, so the price elasticity is greater than 1 in

absolute value

▪ Inelastic Demand – Demand is inelastic when the percentage change in quantity

demanded is less than the percentage change in price, so the price is less than 1

in absolute value.

▪ Unit-elastic Demand – when percentage change in quantity demanded is equal

to the percentage change in price so the price elasticity is equal to 1 in absolute

value

o The Midpoint Formula

▪ See Midpoint Formula

o Polar Cases of Perfectly Elastic and Perfectly Inelastic Demand

▪ Perfectly inelastic demand– when demand curve is a vertical line, where the

quantity demanded is completely unresponsive to price and the price elasticity

of demand equals zero

▪ Perfectly elastic demand – when demand curve is a horizontal line, the quantity

demanded is infinitely responsive to price and the price elasticity of demands

equals infinity

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