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Elasticity Chapter Lecture 3
Elasticity Chapter Lecture 3
Elasticity
McGraw-Hill/Irwin Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Price Elasticity of Demand
LO1 4-3
Price Elasticity of Demand Formula
LO1 4-4
Price Elasticity of Demand Formula
Use percentages
Unit free measure
Compare responsiveness across
products
Eliminate the minus sign
Easier to compare elasticities
LO1 4-5
Interpretation of Elasticity of Demand
LO1 4-6
Extreme Cases
P D1
Perfectly
inelastic
demand
(Ed = 0)
LO1 4-7
Extreme Cases
D2
Perfectly
elastic
demand
(Ed = )
LO2 4-9
Summary of Price Elasticity of Demand
Price Elasticity of Demand: A Summary
LO2 4-10
Determinants of Elasticity of Demand
Substitutability
More substitutes, demand is more elastic
Proportion of Income
Higher proportion of income, demand is
more elastic
Luxuries vs. Necessities
Luxury goods, demand is more elastic
Time
More time available, demand is more elastic
LO1 4-11
Cross Elasticity of Demand
LO4 4-12
Income Elasticity of Demand
Percentage change
in quantity demanded
Ei =
Percentage change in income
LO4 4-13
Ex,y and Ei
Cross and Income Elasticities of Demand
Value of
Coefficient Description Type of Good(s)
Cross elasticity: Quantity demanded of W changes in same Substitutes
Positive (Ewz > 0) direction as change in price of Z
LO4 4-14
Price Elasticity of Supply
LO3 4-15
Price Elasticity of Supply
LO3 4-16