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Chapter 4
Chapter 4
Chapter 4
ECONOMICS I
ECN101
[Handout]
C h a p t e r F o u r
4 ELASTICITY
Elasticity
• The price elasticity of demand measures how strongly buyers respond to a change in the
price of a good.
• The price elasticity of demand can be used to make quantitative predictions of how
changes affect the price and quantity demanded of a good.
• The income elasticity of demand measures how strongly demanders respond to a
change in income, and the cross elasticity of demand measures how strongly demanders
respond to the change in the price of another good.
• The price elasticity of supply measures how strongly producers respond to a change in
the price of a good.
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[(500 − 400) 450] 100 = 22.2 percent.
• The absolute value of the percentage change in price is [($14 − $16) $15] 100 =
13.3 percent.
• Between these two points on the demand curve, the price elasticity of demand is
22.2% 13.3% = 1.67.
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The Factors that Influence the Elasticity of Demand
The magnitude of the price elasticity of demand depends on:
• The closeness of substitutes: The closer and more numerous the substitutes for a good
or service, the more elastic the demand. This is critical for understanding demand in the
market structure section later in the book.
• The proportion of income spent on the good: The greater the proportion of income
spent on a good or service, the more elastic the demand.
• The amount of time elapsed since the price change: The longer the time elapsed since
the price change, the more elastic the demand.
• The cross elasticity of demand is a measure of the responsiveness of the demand for
a good to a change in the price of a substitute or complement, other things remaining
the same.
• The cross elasticity of demand is equal to:
Percentage change in quantity demanded
.
Percentage change in price of a substitute or complement
The changes in the quantity demanded and the price are percentages of the average
price and quantity demanded over the range of change.
• The cross elasticity of demand is positive for substitutes and negative for complements.
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