Unit 4 Elasticity

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1、4ElasticityandItsApplications(PrinciplesofEconomics,Chapter5)Elasticity...…allowsustoanalyzesupplyanddemandwithgreaterprecision.…isameasureofhowmuchbuyersandsellersrespondtochangesinmarketconditionsTHEELASTICITYOFDEMANDPriceelasticityofdemandisameasureofhowmuchthequantitydemandedofagoodrespo

2、ndstoachangeinthepriceofthatgood.Priceelasticityofdemandisthepercentagechangeinquantitydemandedgivenapercentchangeintheprice.ThePriceElasticityofDemandandItsDeterminantsAvailabilityofCloseSubstitutesNecessitiesversusLuxuriesDefinitionoftheMarketTimeHorizonThePriceElasticityofDemandandItsDete

3、rminantsDemandtendstobemoreelastic:thelargerthenumberofclosesubstitutes.ifthegoodisaluxury.themorenarrowlydefinedthemarket.thelongerthetimeperiod.ComputingthePriceElasticityofDemandThepriceelasticityofdemandiscomputedasthepercentagechangeinthequantitydemandeddividedbythepercentagechangeinpri

4、ce.TheMidpointMethod:ABetterWaytoCalculatePercentageChangesandElasticitiesThemidpointformulaispreferablewhencalculatingthepriceelasticityofdemandbecauseitgivesthesameanswerregardlessofthedirectionofthechange.TheMidpointMethod:ABetterWaytoCalculatePercentageChangesandElasticitiesExample:Ifthe

5、priceofanicecreamconeincreasesfrom$2.00to$2.20andtheamountyoubuyfallsfrom10to8cones,thenyourelasticityofdemand,usingthemidpointformula,wouldbecalculatedas:TheVarietyofDemandCurvesInelasticDemandQuantitydemandeddoesnotrespondstronglytopricechanges.Priceelasticityofdemandislessthanone.ElasticD

6、emandQuantitydemandedrespondsstronglytochangesinprice.Priceelasticityofdemandisgreaterthanone.ComputingthePriceElasticityofDemandDemandispriceelastic$54DemandQuantity100050PriceTheVarietyofDemandCurvesPerfectlyInelasticQuantitydemandeddoesnotrespondtopricechanges.PerfectlyElasticQuantitydema

7、ndedchangesinfinitelywithanychangeinprice.UnitElasticQuantitydemandedchangesbythesamepercentageastheprice.TheVarietyofDemandCurvesBecausethepriceelasticityofdemandmeasureshowmuchquantitydemandedrespondstotheprice,itiscloselyrelatedtotheslopeofthede