Question
ECO 1001
ch05
4.The income elasticity of demand measures how much the
quantity demanded responds to changes in consumers’ income.
The cross-price elasticity of demand measures how much the quantity
demanded of one good responds to the price of another good.
5.The price elasticity of supply measures how much the
quantity supplied responds to changes in the price. This
elasticity often depends on the time horizon under
consideration. In most markets, supply is more elastic in the
long run than in the short run.
6.The price elasticity of supply is calculated as the
percentage change in quantity supplied divided by the percentage
change in price. If the elasticity is less than one, so that
quantity supplied moves proportionately less than the price, supply
is said to be inelastic. If the elasticity is greater than
one, so that quantity supplied moves proportionately more than
the price, supply is said to be elastic.
7.The tools of supply and demand can be applied in many
different kinds of markets. This chapter uses them to analyze
the market for wheat, the market for oil, and the market for
illegal drugs.
CHAPTER OUTLINE:I.
The Elasticity of Demand
A. Definition of elasticity: a measure of the responsiveness
of quantity demanded or quantity supplied to one of its
determinants.
92 ? Chapter 5/Elasticity and Its Application
B. The Price Elasticity of Demand and Its Determinants
1.Definition of 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.
2.Determinants of Price Elasticity of Demand
a.Availability of Close Substitutes: the more substitutes a
good has, the more elastic its demand.
b.Necessities versus Luxuries: necessities are more price
inelastic.
c.Definition of the market: narrowly defined markets (ice
cream) have more elastic demand than broadly defined markets
(food).
d.Time Horizon: goods tend to have more elastic demand over
longer time horizons.
C. Computing the Price Elasticity of
Demand1.Formula2.Example: the price of ice cream rises by 10% and
quantity demanded falls by 20%.Price elasticity of demand =
(20%)/(10%) = 23.Because there is an inverse relationship between
price and quantity demanded (the price of ice cream rose by
P r i c e e l a s t i c i t y
of de ma nd = % c ha nge i n
qua nt i t y de ma nde d% c ha nge i
n pr i c eWork through a couple of elasticity calculations,
starting with the example in the book.
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