EC4101 Week 04 Lecture 1 PDF

EC4101 Wk.04 Lec.01 Elasticity: The measure of how much buyers and sellers respond to changes in market conditions. Price Elasticity of Demand (PED): The percentage change in the quantity demanded divided by the corresponding percentage change in its price. PED = (% change...

EC4101 Wk.04 Lec.01 Elasticity: The measure of how much buyers and sellers respond to changes in market conditions. Price Elasticity of Demand (PED): The percentage change in the quantity demanded divided by the corresponding percentage change in its price. PED = (% change in quantity) / (% change in price) It’s a negative number, but the – is often left out. A demand curve is elastic if a change in price changes the quantity demanded by a lot (if the PED is high), otherwise, it is inelastic. → Demand is elastic if the price elasticity is more negative than −1. → Anything between –1 and 0 is inelastic. → Anything at exactly –1 is unit elastic. → At 0, it is perfectly inelastic, the demand curve is vertical. → When perfectly elastic, the demand curve is horizontal. → Steeper demand curves are more inelastic than flatter ones. Price Elasticity of Demand using the Midpoint Method: Instead of using the % change between quantity and change in price, the midpoint formula uses the middle value between the change. E.g. if the price falls from €100 to €90, instead of using 90-100 = -10/100 = –10%, you use 90-100 = -10/95 = -10.52%. Arc Elasticity = Y1-Y0 / X1-X0 Midpoint of Y1 and Y0 Midpoint of X1 and X0 This is where Y1 is the new quantity demanded, Y0 is the original quantity demanded, X1 is the new price and X0 is the original price. The arc elasticity formula is more accurate as it doesn’t matter which direction the change is in.  Factors effecting Elasticity: Substitutes: Goods with many substitutes tend to be of higher elasticity. Taste: If the good is considered luxury, there will be a higher demand elasticity References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg. Image 1: webapi.bu.edu References: Notes based on EC4101 Lecture Slides and the relevant readings from Economics (12th Ed.) David Begg.