Difficulty: 2/3
Chapter Review: 3/5 (Not enough discussion on using the midpoint method. Having trouble answering the problems at the end of the chapter involving elasticity calculations due to lack of example problems)
Last chapter we learned of the forces of supply and demand. This chapter is about measuring that force, determined by the price elasticity.
What is elasticity? Before studying economics, one might think of the word flexibility. And that is essentially what it means in economics. One type of elasticity, the price elasticity of demand, is essentially the flexibility of the demand in response to a change in price. Factors that affect this are availability of close substitutes, whether it is a necessity vs. a luxury, narrowness of definition of the market, and time horizon. To calculate, simply take percent change of quantity demanded over percent change in price.
Mankiw also introduces total revenue, a.k.a. Price x Quantity of a market. In inelastic markets, price and total revenue have a positive relationship, elastic ones have a negative relationship, and n unit elasticity, total revenue remains constant.
Some other "elasticities" include the income elasticity of demand, the cross-price elasticity of demand, and the price elasticity of supply.
All in all, using elasticity in economics is very important. It can be used in a variety of situations, like to analyze how technology really affects farmers, how OPEC controls oil prices, and possible options to fight drug related crime. Armed with this newfound information, an economist can do so much more.
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