Class notes
Econ 2100 Chapter 5 Lecture Notes
- Course
- ECON 2100
- Institution
- Kennesaw State University
This is a comprehensive and detailed note on Chapter 5 Elasticity and Its Application. *Essential!!
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Chapter 5: Elasticity and It's ApplicationSunday, February 14, 2021 10:16 PM
• Tax on gasoline specifically, effects quantity demanded more in the long-run than in the short-run
○ Long-run: drive less and get more fuel efficient cars
• Elasticity
○ Measures how much buyers and sellers respond to changes in market conditions (magnitude
of effects)
Price elasticity of demand ----------------------------------------------------------------
○ Measure of how much quantity demanded responds to change in price
○ Elastic demand
Quantity demanded responds A LOT to change in price
EX.s
□ Beef
□ Peanut butter
□ Restaurant meals
□ Cherries
□ Mountain dew
○ Inelastic demand
Quantity demanded responds A LITTLE to change in price
EX.s
□ Housing
□ Rice
□ Cigarettes
□ Healthcare
□ Eggs
• Influences
○ Availability of Close Substitutes
If available
□ Good has elastic demand
If not available
□ Good has inelastic demand
○ Necessities v.s. Luxuries (based on person's preferences)
Luxuries
□ Good has elastic demand
Necessities
□ Good has inelastic demand
○ Definition of the Market
Narrowly defined markets
□ Good has elastic demand
Bc can find substitutes
◊ EX. Vanilla ice cream market
Broadly defined markets
□ Good has inelastic demand
Bc can't find substitutes
◊ EX. Food market
○ Time horizon
Long time horizon
□ Good has elastic demand (usually)
EX. Tax on gas
Short time horizon
, □ Good has inelastic demand (relatively, and usually)
EX. Tax on gas
○ Computation - normal method
Use when given the percent changes directly, without having to get Point A and Point B
and calculate the changes.
□ Ignore all negative signs that you would usually use for an increase or decrease
(change) in each value. This calc uses absolute value.
EX.
□ Result of 2 for price elasticity of demand
Change in QD (num.) is twice as large as change in P (denom.)
◊ This number is above 1, so good is elastic, and has more responsiveness to
change in price
○ Computation - Midpoint method
Use when having to get Point A and Point B and calculate the changes, bc going from A to
B gives different result (flipped) than going from B to A when using the normal method.
Computes price elasticity of demand by dividing change by the midpoint of the initial and
final levels
□ Left side is computing change, right side is computing midpoint
□ QD change on top and P change on bottom
□ Doesn't make top or bottom into percent's bc not needed
□ Ignore all negative sign at the end, uses absolute value
• Interpreting price elasticity of demand (or supply) values
○ ELASTIC
Greater than 1
Flatter demand curve at a given point
□ quantity demanded moves proportionately MORE than the price
○ INELASTIC
Less than 1
Steeper demand curve at a given point
□ quantity demanded moves proportionately LESS than the price
○ UNIT ELASTICITY
Exactly 1
In the middle of being steep and flat at a given point
□ Percentage change in QD is the same as percentage change in P
○ PERFECTLY INELASTIC
Exactly 0
Vertical line graph
□ QD does not respond/change regardless of change in price
○ PERFECTLY ELASTIC
Approaches Infinity
Horizontal line graph
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