Elasticity of Demand
chapter four
Elasticity of Demand and Supply
CHAPTER OVERVIEW
This is the second chapter in Part Two, “Price, Quantity, and Efficiency.” Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in the chapter. The text attempts to sharpen students’ ability to estimate price elasticity by discussing its major determinants. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Income elasticities of demand, and price elasticity of supply are also addressed.
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to:
1. Define price elasticity of demand and compute the coefficient of elasticity given appropriate data on prices and quantities.
2. Explain the meaning of elastic, inelastic, and unitary price elasticity of demand.
3. Recognize graphs of perfectly elastic and perfectly inelastic demand.
4. Use the total-revenue test to determine whether elasticity of demand is elastic, inelastic, or unitary.
5. List four major determinants of price elasticity of demand.
6. Explain how a change in each of the determinants of price elasticity would affect the elasticity coefficient.
7. Define price elasticity of supply and explain how the producer’s ability to shift resources to alternative uses and time affect price elasticity of supply.
8. Define income elasticity and its relationship to normal and inferior goods.
9. Apply the various types of elasticity to contemporary issues such as taxation and drug policy.
10. Define and identify the terms and concepts listed at end of the chapter.
LECTURE NOTES
I. Introduction A. Elasticity of demand measures how much the quantity demanded changes with a given change in price of the item, change in consumers’ income, or change in price of related product. B. Price elasticity is a concept that also relates to
Elasticity of Demand and Supply
CHAPTER OVERVIEW
This is the second chapter in Part Two, “Price, Quantity, and Efficiency.” Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in the chapter. The text attempts to sharpen students’ ability to estimate price elasticity by discussing its major determinants. The chapter reviews a number of applications and presents empirical estimates for a variety of products. Income elasticities of demand, and price elasticity of supply are also addressed.
INSTRUCTIONAL OBJECTIVES
After completing this chapter, students should be able to:
1. Define price elasticity of demand and compute the coefficient of elasticity given appropriate data on prices and quantities.
2. Explain the meaning of elastic, inelastic, and unitary price elasticity of demand.
3. Recognize graphs of perfectly elastic and perfectly inelastic demand.
4. Use the total-revenue test to determine whether elasticity of demand is elastic, inelastic, or unitary.
5. List four major determinants of price elasticity of demand.
6. Explain how a change in each of the determinants of price elasticity would affect the elasticity coefficient.
7. Define price elasticity of supply and explain how the producer’s ability to shift resources to alternative uses and time affect price elasticity of supply.
8. Define income elasticity and its relationship to normal and inferior goods.
9. Apply the various types of elasticity to contemporary issues such as taxation and drug policy.
10. Define and identify the terms and concepts listed at end of the chapter.
LECTURE NOTES
I. Introduction A. Elasticity of demand measures how much the quantity demanded changes with a given change in price of the item, change in consumers’ income, or change in price of related product. B. Price elasticity is a concept that also relates to