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Elasticity
4.1 Price Elasticity 1. explain what price elasticity of demand is and how
of Demand it is measured.
2. explain the relationship between total expenditure
and price elasticity of demand.
4.2 Price Elasticity 3. explain what price elasticity of supply is and how
of Supply it is measured.
4.3 Elasticity Matters for 4. see how elasticity of demand and supply determine the
Excise Taxes effects of an excise tax.
4.4 Other Demand 5. measure the income elasticity of demand and be able
Elasticities to distinguish between normal and inferior goods.
6. measure cross elasticity of demand and be able to
distinguish between substitute and complement goods.
Copyright © 2017 Pearson Canada Inc. Chapter 4, Slide 2
4.1 Price Elasticity of Demand
The more elastic is demand, the less the change in equilibrium price
and the greater the change in equilibrium quantity resulting from
any given shift in the supply curve.
Q / Qave
=
p / pave
where pave and Qave are the average price and average quantity.
= (1 000)/(2 500)
(1)/(8.5)
= 0.4
0.1176 = 3.40
D1 shows perfectly
inelastic demand
D2 shows perfectly
elastic demand
Availability of Substitutes
Products with close substitutes tend to have elastic demands;
products with no close substitutes tend to have inelastic demands.
Q / Qave
S =
p / pave
Ease of Substitution
If the price of a product rises, how much more can be produced
profitably depends on how easy it is for producers to shift from the
production of other products to the one whose price has risen.
The question of who bears the burden of a tax is called the question
of tax incidence.
With an excise tax, the price paid by the consumer is pc and the price
received by the seller is ps. The consumer price and the seller price
differ by the amount of the tax, t.
Copyright © 2017 Pearson Canada Inc. Chapter 4, Slide 22
4.4 Other Demand Elasticities
The change in the price of good Y causes the demand curve for good
X to shift.