Nick Bristow

Econ 201
Essay #4 Ch. 6
1)
Ch. 6: Elasticity
Chapter 6 begins with defining and measuring elasticity. We learn that the price elasticity of
demand is the ratio of the percent change in quantity demanded to the percent change in the
price. The equation for % change in quantity demanded = (change in quantity demanded) /
(initial quantity demanded) x 100. The % change in price = (change in price) / (initial price) x
100. The price elasticity of demand = (% change in quantity demanded) / (% change in price).
Another method to calculate elasticities is the midpoint method. Price elasticity of demand =
((Q2-Q1) / ((Q1+Q2)/2) ) / ((P2-P1) / ((P1+P2)/2)). When there’s a zero price elasticity of
demand that is also known as a perfectly inelastic demand. When the price elasticity of demand
is infinite, that is called perfectly elastic. If the price elasticity of demand is greater than 1, that
is said to be elastic. When the price elasticity of demand is less than 1, that is said to be inelastic.
When the price elasticity of demand is exactly 1, that is said to be unit-elastic demand. A total
revenue is defined to be the total value of sales of a good or service, equal to the price multiplied
by the quantity sold. Total revenue = price x quantity sold. Inelastic = reduced total revenue.
Elastic = increased total revenue. There are four main factors that determine elasticity, if a good
is a necessity or luxury, the availability of close substitutes, the share of income a consumer
spends on the good, and how much time has elapsed since a change in price. Price elasticity of
demand tends to be low if a good is a necessity. Price elasticity of demand tends to be high if a
good is said to be luxurious. Price elasticity of demand tends to be low if there are no close
substitutes or difficult to obtain. Price elasticity of demand tends to be high if there is similar
items readily accessible. The long run price elasticity of demand is higher than the short run
elasticity. Cross- price elasticity of demand (C.P.E.D)is the ratio of the percent change in the
quantity demanded of one good to the percent change in the price of the other. Cross Price
Elasticity of Demand = % change in quantity of A demanded = % change in price of B. When
two goods are substitutes the C.P.E.D is positive. If they’re close substitutes they are large, if
they are not close substitutes they are small. When two goods are complements, the C.P.E.D is
negative. Weak complements are just below zero, if it’s a large negative number they are very
weak. Next is the income elasticity of demand which is a measure of how much the demand for
a good is affected by the changes in consumers income. Income Elasticity of Demand = %
change in quantity demanded / % change in income. When positive, the good is normal. When
negative, the good is inferior. Greater than 1 means it’s income elastic, less than one means its
income inelastic. Next is the price elasticity of supply which is the same as C.P.E.D except there
is no negative. Price Elasticity of Supply = % change in quantity supplied / % change in price.
When the P.E.S = 0, this is called perfectly inelastic supply (vertical line). A perfectly elastic
supply means there’s a tiny increase or decrease in price which changes the quantity supplied
(horizontal line). What determines the price elasticity of supply? The availability of inputs and
time.

2)
Current Event:
This week I chose to write about the price elasticity of demand for gasoline. I found an article
that goes over examples and studies that show how the price, supply and demand of gas
increases and decreases. According to Moffatt’s article, in a short-run (1 year or less) the price-
elasticity of demand is -.26 which means if the price of gas raises 10% in price, the quantity
demanded would be lowered by 2.6%. I can relate to this because when gas starts to go up, I
Nick Bristow
Econ 201
Essay #4 Ch. 6
find myself making less trips in my truck. What I do instead is if something is cheaper at a
different store, I might end up buying at the store I would currently be at to save myself from
having to make another trip to a different store. I also try to avoid making any unnecessary
drives. Now in the long-run (over 1 year), the price-elasticity of demand is -.58 which means if
the price of gas raises 10% in price, the quantity demanded would be lowered by 5.8%. This
article concludes that if the price of gas constantly increases, statistics say consumption of gas
will severely decline. In my opinion, if gas continued to raise in price, I would definitely
continue to limit my driving but I don’t think I would ever result into switching to an electric car,
taking public transportation, etc. Typically gas goes up in the summer and down as the summer
ends. I work a lot more in the summer so I don’t necessarily see a huge effect on myself.

Works Cited:
Moffatt, Mike. “What's the Price Elasticity of Demand for Gasoline?” ThoughtCo, ThoughtCo, 3
Sept. 2018, www.thoughtco.com/price-elasticity-of-demand-for-gasoline-1147841.

3)
Questions:
I know this is supposed to be a brief summary of the chapter but I’m not sure what to include and
exclude. For example, in this chapter we learned how to calculate different equations. Would
you prefer me to write the equation out or just say “We learned how to calculate Cross Price
Elasticity of Demand.” Also, on this week’s quiz, we had to arrange from most elastic to least
elastic. I got all but 2 letters correct but I got a 0 for that question. Do you allow partial credit?

Thanks,
Nick