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We construct market demand curves for products by horizontally summing quantities demanded of a good by each person in the market. So, if there are two people in the market for good , at a certain price, , individual 1 will demand and individual 2 will demand . We add up , and this gives us the total quantity demanded at the market at . 

Market demands will be represented by capital letters from now on, and individual demands by lower case letters. 

This lecture introduces the concept of elasticity. 

Definition. Elasticity is the percentage change in one variable brought about by a one percent change in some other variable. 

The price elasticity of demand,  , is defined mathematically as the logarithmic derivative of the market demand curve. But we don't need to be so technical. We can just define it in a point-wise way as the percentage change in quantity demanded for a given percentage change in price, or

The price elasticity of demand looks at movements along a demand curve, and tells you him much in percentage terms quantity changes for each per cent change in price. 

History. Elasticity as a concept is borrowed from materials science and applied mathematics. The theory was developed to understand how metals stress under extremes of heat and cold. It was this theory which allowed the Eiffel tower to be built. 

Example. We'll work out a numerical example in class, and I'll show you a mathematica demonstration of elasticity at work on total revenue in a market. 

Application. We'll look at the effects of rising oil prices on driving patterns in the USA. 

Concepts to know: Elasticity, Elasticity of Demand, Inelastic and elastic demand.

Exercises to try: 4.1, 4.2, 4.10

One Response to “EC4004, Ecs for Business, Lecture 4: Market Demand and Elasticity”

1. Laura

   19/09/2008 at 4:32 pm

   You're definitely my favourite lecturer so far! Even went into your lecture hungover and wrecked but still didn't fall asleep in it... If only they were all made as interesting as yours 🙂