TAILIEUCHUNG - Lecture Principles of economics (Asia Global Edition) - Chapter 4

Chapter 4 - Elasticity. We begin in chapter 4 by exploring the concept of elasticity, which describes the sensitivity of demand and supply to variations in prices, incomes, and other economic factors. | Elasticity Chapter 4 McGraw-Hill/Irwin Copyright © 2015 by McGraw-Hill Education (Asia). All rights reserved. The Basics Learning Objectives Define price elasticity of demand and explain what determines whether demand is elastic or inelastic Calculate the price elasticity of demand using information from the demand curve Understand how changes in the price of a good affect total revenue and total expenditure depending on the price elasticity of demand for the good Explain the cross-price elasticity of demand and income elasticity of demand Discuss the price elasticity of supply, explain what determines whether supply is elastic or inelastic, and calculate the price elasticity of supply using information from a supply curve Drug Enforcement and Local Theft Hypothesis Drug users steal to buy drugs Increasing drug enforcement will decrease theft Analysis Increased enforcement reduces supply of drugs Price of drugs increases Quantity demanded decreases Theft goes down ONLY IF total expenditure on drugs decreases How responsive is quantity demanded to price? Price Elasticity of Demand Price elasticity of demand is defined as the percentage change in quantity demanded from a 1% change in price Measure of responsiveness of quantity demanded to changes in price Example: Price of beef decreases 1% Quantity of beef demanded increases 2% Price elasticity of demand is – 2 P Q Calculate Price Elasticity Symbol for elasticity is ε Lower case Greek letter epsilon For small percentage changes in price ε = Percentage change in quantity demanded Percentage change in price Price elasticity of demand is always negative Ignore the sign Elastic Demand If price elasticity is greater than 1, demand is elastic Percentage change in quantity is greater than percentage change in price Demand is responsive to price 3 Price Elasticity of Demand Inelastic Unit elastic Elastic 2 1 0 Inelastic Demand If price elasticity is less than 1, demand is inelastic Percentage change in quantity is less .

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