Homework

• Elasticity concerns responsiveness to changes in price.

Price Elasticity of Demand

• PED is defined as the responsiveness of quantity demanded to a change in the price of the good or service. #testanswer
  • The formula for $Ed$, (as per discovering economics) is Ed = \frac{%change \space in \space quantity \space demanded}{% change \space in \space price}
    • An $Ed < 1$ indicates a good that is inelastic, and this is known as the elasticity coefficient - to graph, a relatively steep curve
    • An $Ed > 1$ indicates a good that is elastic to changes in price - to graph, a relatively flat curve
    • An $Ed=0$ indicates a good that is perfectly inelastic - to graph, $x=n$
    • An $Ed=\infty$ indicates a good that is perfectly elastic - to graph, $y=n$
  • However, what is demonstrated above is the point method; this will give different answers depending on whether we are increasing or decreasing price
    • An alternative is the midpoint method. The formula goes as follows: $$\frac{\triangle Q}{Q_{av}}\times \frac{P_{av}}{\triangle P}$$
    • The advantge of this is that the answer does not depend on which price we choose as the starting price.

PED and TR/TE

• PED is important in that it has a link with total revenue and total expenditure - $TR(TE)=P\times Q$
  • Graphs in PPT - PED demonstrate this correlation
  • Firms will use elasticity to price discriminate between customers - depending on whether their demand is elastic or inelastic
• Along a linear curve, PED changes - the top half is elastic, while the bottom is inelastic. The midpoint has an $Ed=1$.
• Again as noted in PPT - PED, there are five main determinants of PED
  • Availability of Substitutes
  • Whether the good is a necessity or a luxury
  • Definition of the market
  • The proportion of income spent
  • Time

Price Elasticity of Supply

• PES measures the responsiveness of quantity supplied to a change in price #testanswer