Principles of Microeconomics Lecture 10 – Market Demand

Principles of Microeconomics Lecture – Market Demand

 Elasticity measures the “sensitivity” of one variable with respect to another.
 The elasticity of variable X with respect to variable Y is


o
 Economists use elasticities to measure the sensitivity of
o quantity demanded of commodity i with respect to the price of commodity i (own-price elasticity of
demand)
o demand for commodity i with respect to the price of commodity j (cross-price elasticity of demand).
 The slope of the demand curve is not used to measure sensitivity of quantity demanded toa change in a
commodity’s own price because the value of sensitivity then depends upon the (arbitrary) unites of
measurement used for quantity demanded
 Own price elasticity of demand is a ratio percentages and so has no units of measurement
o Hence own price elasticity of demand is a sensitivity measure that is independent of units of
measurement
 If raising a commodity’s price causes little decrease in quantity demanded, then sellers’ revenues rise.
o Hence own-price inelastic demand causes sellers’ revenues to rise as price rises
 If raising a commodity’s price causes a large decrease in quantity demanded, then sellers’ revenues fall.
o Hence own-price elastic demand causes sellers’ revenues to fall as price rises.
