Econ 2100 Chapter 5 Lecture Notes

Chapter 5: Elasticity and It's Application
Sunday, 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