Lecture Principles of Microeconomics - Chapter 4: Elasticities. After reading this chapter, you should be able to answer the following questions: What is price elasticity of demand? What are categories of demand elasticity and what factors influence them? What is the relationship between demand elasticity and total revenue? What is income elasticity of demand? What is cross elasticity of demand? What is price elasticity of supply? What are categories of supply elasticity and what factors influence them? | Chapter 4 Elasticities McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved. Learning Objectives What is price elasticity of demand? What are categories of demand elasticity and what factors influence them? What is the relationship between demand elasticity and total revenue? What is income elasticity of demand? What is cross elasticity of demand? What is price elasticity of supply? What are categories of supply elasticity and what factors influence them? 4- Price Elasticity of Demand Price elasticity of demand measures consumers’ responsiveness to price changes. How much quantity demanded will change if price changes. Ignore the negative sign since it’s always there. 4- Categories of Demand Elasticity If price elasticity of demand >1: % change in quantity demanded > % change in price Elastic demand If price elasticity of demand 4- Price Elasticity of Demand Price elasticity of demand measures consumers’ responsiveness to price changes. How much quantity demanded will change if price changes. Ignore the negative sign since it’s always there. 4- Categories of Demand Elasticity If price elasticity of demand >1: % change in quantity demanded > % change in price Elastic demand If price elasticity of demand 4- Elastic Demand Curve A small percentage change in price: A large percentage change in quantity. The price elasticity of demand between Point A and Point B is high. Price elasticity of demand > 1. Point A Point B $8 $7 220 100 Price Quantity Demand 4- Inelastic Demand Curve Point A Point B Quantity 100 110 $10 $4 Price A large percentage change in price: A small percentage change in quantity. The price elasticity of demand between Point A and Point B is low. Price elasticity of demand 4- Perfectly Inelastic Demand Curve Quantity Price Quantity demanded is constant and does not respond to price changes. Price elasticity of demand = 0. This demand curve violates the Law of Demand. Unrealistic demand curve. 4- Perfectly Elastic Demand Curve Quantity Price Quantity demanded is extremely responsive to price changes. The smallest price change causes infinite change in quantity .
