Chapter+5+Elasticity+and+Its+Application+(Joon,+Scott,+and+Steven)

Elasticity and Its Application




 * Key Terms **


 * Elasticity**: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
 * Price Elasticity of Demand**: a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price
 * Total Revenue**: the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
 * Income Elasticity of Demand**: a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
 * Cross-price Elasticity of Demand**: a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good
 * Price Elasticity of Supply**: a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

So far, we've discussed about how the direction of a market economy moves due to changes in supply and demand. In this chapter, we will talk about how much (the size) the market economy can change, using the idea of elasticity.

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**The Price Elasticity of Demand and its Determinants**

The price elasticity of demand measures how much the quantity of demand changes due to its change of price. Demand is considered elastic if the change in quantity is large compared to its change in price. On the other hand, demand is considered inelastic if the change in quantity is relatively small compared to its change in price. There are four factors that can determine such elasticity of demand...

1. Availability of Close Substitutes 2. Necessities versus Luxuries 3. Definition of the Market 4. Time Horizon

Here is a podcast giving examples of each




 * Computing the Price Elasticity of Demand **

The equation for computing the price elasticity of demand is SIMPLE !!!!

//Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price//


 * The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities **

However, you will come up with a problem when using the equation above that change of Point A to Point B is different from change of Point B to Point A. Therefore, you can use different equation: the midpoint method

Price elasticity of demand = (Quantity 2 + Quantity 1)/2 || ÷ || (Price 2 - Price 1) (Price 2 + Price 1)/2 ||
 * (Quantity 2 - Quantity 1)


 * The Variety of Demanded Curves **

Demand is elastic if... elasticity is greater than 1

(example of a perfectly inelastic graph)

Demand is inelastic if... elasticity is less than 1

(example of a perfectly elastic graph)

Demand is unit elastic if... elasticity is equal to 1

(example of a unit elastic graph)

**Total Revenue and the Price Elasticity**

The total revenue calculates the total amount paid by the consumers and sold by the suppliers. The equation to find the total revenue is also very simple...

Total revenue = Price * Quantity

(example of a total revenue graph)

**Other Demand Elasticities**


 * The Income Elasticity of Demand
 * measures how much the quantity of demand changes due to one's change in incomes
 * Income elasticity of demand = Percentage change in quantity demanded / Percentage change in income
 * The Cross-Price Elasticity of Demand
 * measures how much the quantity of demand changes due to a change of price of another good
 * Cross-price elasticity of demand = Percentage change in quantity demanded of good 1 / Percentage change in the price of good 2

**The Price Elasticity of Supply and Its Determinants**

The price elasticity supply measures how much the quantity of supply changes due to its change of price. Similarly to the demand elasticity, supply is considered inelastic if the change of the quantity of supply is relatively small compared to its changes of the price. Supply is considered elastic if the change of the quantity of supply is relatively large compared to its changes of the price.

**Computing the Price Elasticity of Supply**

The equation to calculate the price elasticity of supply is SIMPLE too!!!

//Price elasticity of supply = Percentage change in quantity supplied / Percentage change in price//

**The Variety of Supply Curves**

Supply is inelastic if... the elasticity is less than 1

(example of perfectly inelastic graph)

Supply is elastic if... the elasticity is greater than 1

(example of perfectly elastic graph)

Supply is unit elastic if... the elasticity is equal to 1

(example of unit elastic graph)

Overall, understanding the basic concepts of "supply and demand" and their "elasticities" is crucially essential when studying economy. This chapter, along with the previous chapter, will become a skillful tool in understanding many other important concepts regarding microeconomics.


 * Review Questions**

1. Whats the difference between elastic and inelastic? 2. For 15 years, Steven had been working as a cashier in McDonalds. But recently, he have just changed his job and is now working for Samsung as an important business man. In order to calculate his elasticity of demand, what equation should he use? 3. Name four factors that affect the demand elasticity, and give examples for each.

Answers 1. The product is considered elastic if the the product's change of quantity of supply/demand is relatively large compared to its change of price. But the product is considered inelastic if the product's change of quantity of supply/demand is relatively small compared to its change of price. 2. Income elasticity of demand 3. Availability of close substitutes, necessities versus luxuries, definition of the market, and time horizon. Examples may vary.

Student Produced Resource [|Quizlet Chapter 5] Sources

http://www.sunandmoonstudio.com/Poses/poses.shtml http://www.webshells.com/college/grid10.htm http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=factor+supply+curve http://www.mathsonline.co.nz/demo/eol/shell.php?content=content01.php http://www.answers.com/topic/price-elasticity-of-demand http://www.bized.co.uk/virtual/dc/trade/theory/th17.htm