Chapter 5: Elasticity and its Application

Chapter 5 is all about elasticity, which is a measure of how demand or supply responds to a determinant. First off is the price elasticity of demand, which measures how much the quantity demanded changes in response to a price. This is determined through substitutes, luxuries/necessities, market, and time. If a good has no close substitutes, it would be closer to inelastic, whereas if two goods are closely related, prices could change dramatically. Luxuries and necessities depends on a person’s point of view on what either is, but the general idea is that necessities are more inelastic than compared to luxuries. The market changes demand based off how we define it, so if we categorize a good into a more broad category, it would be less inelastic and more elastic for a specific category. Meanwhile, there is the income elasticity of demand measuring how demand changes with consumer income and the cross price elasticity of demand which measures how much the demand of one good changes the price of another. Finally, time is a determinant based off the long or short run. We can compute the price elasticity of demand by using an equation of the percentage change in demand divided by the percentage change in price. However, given a graph, we could use another equation if we are given two points on the graph. The equation in this case would be ((x2-x1)/((x2+x1)/2))/((y2-y1)/((y2+y1)/2)). Finally, the last equation we could use to help us define elasticity would be total revenue = price*quantity, and the resulting number helps illustrate some rules concerning the elasticity of a product or good. Besides demand, elasticity also applies to supply. Similar to elasticity of demand, the elasticity of supply compares how the supply responds to a change in price. The elasticity of supply is determined by the flexibility of sellers to change how much they produce and time periods. Time is a major determinant for both the elasticity of supply or demand. Elasticity of supply is measured through dividing the percentages of supply and price, given values. The supply curves change with the values that are calculated using the equation, and the values determine the kind of graph. Like demand, supply has 5 graphs. The shape and size of the graph is found through the equation, and using the information provided, we calculate the number and create the graph that way. This is a general summary of Chapter 5 in “Principles of Economics” by George Mankiw: Elasticity and its Application.