Economics Summary Chapter 4 Elasticity and its applications

Economics Chapter 4 Summary
‘Elasticity and its applications’.

Elasticity – a measure of the responsiveness of quantity demanded or quantity supplied to one of its
determinants.

The price elasticity of demand
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 divided by the
percentage change in price.
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

((In this boos we follow the common practise of dropping the minus sign and reporting all the price
elasticities as positive numbers!!))

Its determinants:
Availability of close substitutes
-> the closer the substitute, the more price elastic the good is (buyers can easily switch)
Necessities versus luxuries
-> necessities, inelastic demand / luxuries, elastic demand
Definition of the market
-> the narrowly defined the market, the more elastic the demand
Proportion of income devoted to the product
-> the higher the proportion of income devoted to the product,the greater the price elasticity
Time horizon
-> the longer the time horizon, the more elastic demand a good tend to have



o The midpoint method
If you try calculating the price elasticity of demand between two points on a demand curve

(𝑄2 − 𝑄1 )
[(𝑄2 + 𝑄1 ):2]
Price elasticity of demand = (𝑃 − 𝑃 )
2 1
[(𝑃2 + 𝑃1 ):2]


(Multiply both to get an percentage (No minus numbers!))