When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps. | Lecture Issues in economics today - Chapter 3 Chapter 3 The Concept of Elasticity and Consumer and Producer Surplus McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Chapter Outline ELASTICITY OF DEMAND ALTERNATIVE WAYS OF UNDERSTANDING ELASTICITY MORE ON ELASTICITY CONSUMER AND PRODUCER SURPLUS McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Elasticity Elasticity the responsiveness of quantity to a change in another variable Price Elasticity of Demand the responsiveness of quantity demanded to a change in price Price Elasticity of Supply the responsiveness of quantity supplied to a change in price Income Elasticity of Demand the responsiveness of quantity demanded to a change in income Cross Price Elasticity of Demand the responsiveness of quantity demanded of one good to a change in the price of another good McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. The Mathematical Representation of Elasticity ΔQ ΔQ Q Elasticity ΔP ΔP P Because the demand curve is downward sloping and the supply curve is upward sloping the elasticity of demand is negative and the elasticity of supply is positive. Often these signs are implicit and ignored. McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Elasticity Labels Elastic the condition of demand when the percentage change in quantity is larger than the percentage change in price Inelastic the condition of demand when the percentage change in quantity is smaller than the percentage change in price Unitary Elastic the condition of demand when the percentage change in quantity is equal to the percentage change in price McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Alternative Ways to Understand Elasticity The Graphical Explanation McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. The Relationship Between Slope and Elasticity Elasticity and the slope of the demand curve are not
