Preview to Elasticity:

Elasticity Concept / The elasticity concept measures how sensitive:
Price elasticity of demand / the quantity demanded of a good is to its own price
Income elasticity of demand / the quantity demanded is to income
Cross price elasticity of demand / the quantity demanded of one good is to the price of another good.
Price elasticity of supply

Outline:

A. Price Elasticity of Demand

1. Definition

2. What the slope of the demand curve implies about the sign of the price elasticity of demand

3. Computation – Non-calculus method

4. Computation – Calculus method

5. Classifying the magnitude of the elasticity of demand – elastic, unitary, inelastic

6. Verbal interpretation of price elasticity of demand

7. Relationship between the price elasticity of demand and consumer expenditure on the good

B. Other Elasticities of Demand and Supply

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A. Price Elasticity of Demand

1. Definition

The price elasticity of demand (for gasoline) is

2. What the slope of the demand curve implies about the sign of the price elasticity of demand

3. Computation - Non-calculus method

Reminder about the general idea of a percentage change:
A percentage change in price is the change in price divided by the price.

To compute the price elasticity of demand we need information about the quantity demanded for at least two different prices (with all factors other than the price of the good held constant).

Price Elas. of Demand / Price Elas. of Demand / Price Elas. of Demand
Price of a gallon of gas / Income / Price of a Bus Ride / Gallons Gasoline Demanded Per Wk / (using 1st P&Q listed) / (using 2nd P&Q listed) / (arc method)
$1.10 / I=$40,000/yr / $0.75 / 1020
$1.20 / I=$40,000/yr / $0.75 / 1000
$1.30 / I=$40,000/yr / $0.75 / 990

4. Computation – Calculus Method

By definition,

Applying the calculus method of computing the price elasticity of demand to a linear D curve:

Qd = a – bp

Point as labeled on the Demand Curve / /
1
2
3
4
5

5. Classification of the magnitude of the elasticityof demand

6. Verbal interpretation of the elasticity of demand

7. Relationship between Elasticity and Consumer Expenditure

The number of units demanded at price p is D(p) and the total expenditure on the good is

We want to examine the effect of a change in p on total expenditure.

Elasticity of the Demand Curve / Change in Price / Change in Quantity Demanded / Change in Expenditure
Inelastic / P↑
Unitary Elastic / P↑
Elastic / P↑

B. Other Elasticities of Demand or Supply

Data needed to compute by non calculus method / Calculus Method
Income Elasticity of Demand
Price Elasticity of Supply
Cross Price Elasticity of Demand
If the two goods are complementary, is the sign positive or negative?\
If the two goods are substitutes, is the sign
positive or negative?