Ch.

5 Notes- Elasticity and Taxation:

Demand is INELASTIC if it does not respond much to price changes and ELASTIC if demand
changes a lot when the price changes.
-Necessities inelastic demand.
-Luxuries elastic demand.
-Close substitutes elastic demand.
-Price elasticity of demand= the ratio of the percent change in quantity demanded to the percent
change in price
Step 1.
% change in quantity demanded=change in quantity demanded / initial quantity demanded X 100
Step 2.
% Change in price= change in price / initial price X 100
3. Price elasticity of demand = % change in quantity demanded / % change in price
*law of demand= demand curves are downward sloping, so a positive percent chance in price (a
rise in price) leads to a negative percent change in the quantity demanded; a negative percent
change in price (a fall in price) leads to a positive percent change in the quantity demanded.
-A NEGATIVE NUMBER
-The LARGER the price elasticity of demand, the more responsive the quantity demanded is to
the price.
Alt. Way to Calculate Elasticities: Midpoint Method
-EQUATION- `
% Change in X= Change in X / average value of X x 100
Where the average value of x= starting value of X + final value of X / 2
-INELASTIC = price elasticity of demand that is less than 1
-ELASTIC= price elasticity of demand that is greater than 1
-UNIT ELASTIC= price elasticity of demand is 1
-Revenue INCREASES if demand is INELASTIC
-Revenue DECREASES if demand is ELASTIC
-Revenue STAYS THE SAME if demand is UNIT ELASTIC
-For NORMAL GOODS, the income elasticity of demand is POSITIVE
-For LUXURY GOODS, the income elasticity of demand is GREATER THAN 1
-For INFERIOR GOODS, the income elasticity of demand is NEGATIVE