Ch. 5: Elasticity A measure of how much buyers and

sellers respond to changes in market conditions: Changes in : Price; Income; Price of Related

Goods

S + D discussion has been qualitative so far….

…now we begin quantitative How much does S + D change in

response

= A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants

Price Elasticity of Demand =measure of how much the quantity

demanded of a good responds to a change in the price of that good

= % change in Qd % change in P D for a good is ELASTIC if…. Qd responds

more than P D for a good is INELASTIC if….Qd

responds less than P

Ex: If P of ice cream rises 10% and it causes

you to buy 20% less ice cream % change Qd 20% = 2 % change P 10%………the PEd for ice cream = 2 Less 1 = inelastic1 = unit elasticGreater 1 = elastic0 = perfectly inelasticInfinite = perfectly elastic

Determinants of Elasticity Economic, social, psychological forces

shape consumer behavior

1. Necessities vs. Luxuries2. Availability of Close Substitutes3. Definition of the Market (broad or

narrow) 4. Time Horizon (long or short)

0 = perfectly inelastic

infinite = perfectly elastic

Less than one = inelastic

One = unit elastic

Greater than one = elastic

Steeper the slope , ………. The more inelastic

Linear D curve Slope is constant What about Elasticity? Elasticity changes How/Why?

Negatives do not matter for PED Mid point method p. 96 Total Revenue (PxQ) Inelastic :

P increase ; then TR ….. increases - why ? P decrease; then TR ….. Decreases – why? So the rule is…….

Elastic: P increases; TR….? TR decreases - why P decreases; TR …..? increases - why So the rule is……..

TR when D is Unit Elastic

Elastic: as P falls, TR rises

Inelastic: as P falls TR falls

what about TR when it’s Unit Elastic?

TR when D is Unit Elastic What if it is Unit Elastic over a range…? As P falls, TR would not change