In chapter four we learned the basics of the relationship that supply and demand have. Now in chapter 5 we learn about the quantitative side and how people respond to changes in the market.
It's important to note that the way we measure elasticity is a mathematical equation that goes something like this: (Quantity Demanded2-Quantity Demanded2)/ (QD1+QD2/2) all over (Price2-Price1)/ (Price1+Price2/2) An equation much easier written out than typed basically telling us that elasticity= percentage change in quantity demanded over the percentage change in price.
We also learn about the four things that affect elasticity such as the definition of the market, time (the only thing to affect supply), necessity v luxury and the availability of close substitutes.
Definition of the market talks about the narrow and broad perspective. Food is broad and therefore is inelastic because you can't get what you need from it elsewhere. Fries on the other hand are very elastic because you have a variety of options from where to get them. This closes into substitutes, if there are many replacements for it then the product is more elastic.
Necessity versus luxury is inelasticity versus elasticity, respectively. A necessity such as food and water will be paid for at each and every price because it is a need, but a car on the other hand a luxury since we don't have to use it and it's just an extra expense.
In this chapter we also learn about the elasticity of income and as well as the Cross Price elasticity. Income elasticity informs us how the percent in quantity demand changes as the percentage in income changes. The elasticity of this would inform whether a good is generally a normal or inferior one. Cross Price elasticity informs us of the percentage change on one good over the price change in another.
Throughout we learn the forms in which both supply and demand curves appear. A vertical line would imply that they are inelastic while a completely horizontal will imply perfect elasticity.
