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CHAPTER 20
Elasticity: Demand and Supply
Summary
1.
How do we measure how much consumers alter their purchases in response
to a price change?

The price elasticity of demand is a measure of the responsiveness of consumers
to changes in price. It is defined as the percentage change in the quantity
demanded of a good divided by the percentage change in the price of the good.
§1.a

The price elasticity of demand is always a negative number because price and
quantity demanded are inversely related. §1.a

A straightstrai-line demand curve is separated into three parts by the price
elasticity of demand. Demand is price elastic at the top of the curve and then
as you move down the curve It becomes unit elastic and then inelastic. §1.b.1
2
Why are measurements of elasticity important?

Comparing the price elasticity of demand for various products/services allows
economists to see how consumers respond to price changes. In other words, it
can tell us how big a difference price makes in a particular purchasing
decision. §1.c
3.
What determines whether consumers alter their purchases a little or a lot in
response to a price change?

Everything else held constant, the greater the number of close substitutes, the
greater the price elasticity of demand. §2.a

Everything else held constant, the greater the proportion of a household’s
budget that a good constitutes, the greater the household’s elasticity of demand
for that good. §2.a

Everything else held constant, the longer the time period under consideration,
the greater the price elasticity of demand. §2.c.
4.
How do we measure whether changes in income, changes in the prices of
related goods, or changes in advertising expenditures affect consumer
purchases?

Elasticities can be calculated for any variable that affects demand -- the
determinants of demand -- such as income, prices of related goods, advertising, and
others. §3

The cross-price elasticity of demand is defined as the percentage change in the
demand for one good divided by the percentage change in the price of a related
good, everything else held constant. §3.a

When the cross price elasticity is positive, the goods are substitutes. When it is
negative, the goods are complements. §3.a

The income elasticity of demand is defined as the percentage change in the demand
for a good divided by the percentage change in income, everything else held
constant. §3.b
5.
How do we measure whether producers respond to a price change?

The price elasticity of supply is defined as the percentage change in the quantity
supplied of a good divided by the percentage change in the price of that good,
everything else held constant. §4.a

The short run is a period of time short enough that the quantities of at least some of
the resources cannot be varied. The long run is a period of time just long enough
that the quantities of all resources can be varied. §4.b

In general, the more elastic the demand and the less elastic the supply, everything
else held constant, the more the incidence of a tax or the incidence of a cost
increase falls on businesses and the less on consumers. §4.c