Page 59 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes 4.5 Summary

Elasticity of demand tells the degree of responsiveness of consumer to a price change. It
is measured as:
Percentage change in quantity demanded
e =
p Percentage change in price
The arc elasticity is a measure of average elasticity, that is, the elasticity at the midpoint

of the chord that connects the two points (A and B) on the demand curve defined by the
initial and new price levels.
The income elasticity of demand is a numerical measure of the degree to which quantity
demanded responds to a change in income, other determinants of demand being kept
constant.

The cross elasticity of demand is a numerical measure of the degree to which quantity
demanded of a good responds to changes in the prices of other commodities, the other
determinants of demand being kept constant.

An understanding of elasticity is fundamental in understanding the response of supply
and demand in a market.

4.6 Keywords

Arc elasticity: It computed if the data is discrete and therefore incremental change is
measurable.
Cross elasticity: Degree to which demand for one product is affected by the price of another
product.

Demand elasticity: Elasticity used to show the responsiveness of the quantity demanded of a
good or service to a change in its price.
Elasticity: It measures the degree of responsiveness of demand/supply to change in price.
Point elasticity: It computed if demand function is continuous and therefore only marginal
changes are calculable.

4.7 Self Assessment

Fill in the blanks:
1. Elasticity of demand measures responsiveness of demand of a commodity to ………..,
……………and…………………..

2. Such horizontal demand curves, where quantity demanded is infinitely responsive to price
changes, are called ........................ .

3. Demand curves which have an elasticity coefficient as 1 are called ........................ .
4. All such demand curves where quantity demanded is totally unresponsive to changes in
price are called .............. .
5. The demand is ................ in the long run.
State whether the following statements are true or false:
6. If we go by the Law of Demand, the price elasticity for most goods would be negative.
7. The price elasticity of a straight line demand curve varies from zero to infi nity.

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