Chapter 5 Summary 1 Elasticity is a general measure of responsiveness that can be used to quantify many different relationships If one variable A changes in response to changes in another variable B the elasticity of A with respect to B is equal to the change in A divided by the change in B 2 The slope of a demand curve in an inadequate measure of responsiveness b c its value depends on the units of measurement used For this reason elasticities are calculated using percentages PRICE ELASTICITY OF DEMAND p 98 3 Price elasticity of demand is the ratio of the change in Qd of a good to the change in P of that good 4 Perfectly inelastic demand is demand whose Qd does NOT respond at all to changes in P its numerical value is 0 5 Inelastic demand is demand whose Qd responds somewhat but not a great deal to changes in P its numerical value is between 0 1 6 Elastic demand is demand in which the change in Qd is larger in absolute value than the change in P Its numerical value is less than 1 7 Unitary elasticity of demand describes a relationships in which the change in Qd of a product is the same at the change in P unitary elasticity has a numerical value of 1 8 Perfectly elastic demand describes a relationship in which a small increase in the price of a product causes the Qd for that product to drop to 0 CALCUALTED ELASTICITIES p 100 9 There are a number of ways to calculate elasticity The most common methods are the midpoint formula which uses midpoint values for prices quantities to calculate elasticity between two points on a demand curve and the point elasticity which calculates elasticity at a point by using the slope and the P and Q values at that point 10 If demand is elastic a P will Qd by a larger than the P and TR total revenue P Q will If demand is inelastic a P will TR total revenue 11 If demand is elastic a price cut will cause Qd by a greater than the P and TR will If demand is inelastic a price cut will cause Qd by a smaller than the P and TR will THE DETERMINANTS OF DEMAND ELASTICITY p 107 12 The elasticity of demand depends on 1 the availability of substitutes 2 the importance of the item in individual budgets 3 the time frame in question OTHER IMPORTANT ELASTCITIES p 110 13 There are several important elasticities Income elasticity of demand measures the responsiveness of the Qd with respect to changes in income Cross price elasticity of demand measure the response of the Qd of one good to a change in the P of another good Elasticity of supply measures the response of the Qs of a good to a change in the P of that good The elasticity of labor supplied measures the response of the Qs of labor to the change in the P of labor