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Lecture Economics (9/e): Chapter 6 - David C. Colander

Chapter 6, Describing supply and demand: elasticities. In this chapter, the learning objectives are: Use elasticity to describe the responsiveness of quantities to changes in price and distinguish five elasticity terms, explain the importance of substitution in determining elasticity of supply and demand, relate price elasticity of demand to total revenue,. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Use elasticity to describe the responsiveness of quantities to changes in price and distinguish five elasticity terms Define and calculate income elasticity and cross-price elasticity of demand Relate price elasticity of demand to total revenue Explain the importance of substitution in determining elasticity of supply and demand Explain how the concept of elasticity makes supply and demand analysis more useful 2 Price Elasticity: Demand Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price This tells us exactly how quantity demanded responds to a change in price ED = Elasticity is independent of units % change in Quantity Demanded % change in Price Price elasticity of demand is always expressed as a positive number 3 Price Elasticity: Demand Demand is elastic if the percentage change in quantity is greater than the percentage change in price Elastic demand is when ED > 1 Demand is inelastic if the percentage change in quantity is less than the percentage change in price Inelastic demand is when ED < 1 4 Elasticity is Not the Same as Slope Elasticity is not the same as slope, but, the steeper a curve is at a given point, the less elastic demand or supply This curve is perfectly elastic, meaning that Q responds enormously to changes in price, ED = ∞ This curve is perfectly inelastic, meaning that Q does not respond at all to changes in price, ED = 0 P Q D D P Q 5 Price Elasticity: Supply Price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price This tells us exactly how quantity supplied responds to a change in price ES = Elasticity is independent of units % change in Quantity Supplied % change in Price 6 Price Elasticity: Supply Supply is elastic if the percentage change in quantity is greater than the percentage change in price Elastic supply . | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Use elasticity to describe the responsiveness of quantities to changes in price and distinguish five elasticity terms Define and calculate income elasticity and cross-price elasticity of demand Relate price elasticity of demand to total revenue Explain the importance of substitution in determining elasticity of supply and demand Explain how the concept of elasticity makes supply and demand analysis more useful 2 Price Elasticity: Demand Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price This tells us exactly how quantity demanded responds to a change in price ED = Elasticity is independent of units % change in Quantity Demanded % change in Price Price elasticity of demand is always expressed as a positive number 3 Price Elasticity: Demand Demand is elastic if the percentage change in quantity is greater than the .