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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