Elasticity (42 pages)

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Elasticity



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Elasticity

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Pages:
42
School:
Cornell University
Course:
Econ 101 - Intro Economics (Micro)
Intro Economics (Micro) Documents

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Elasticity 1 Elasticity measures What are they Responsiveness measures Why introduce them Demand and supply responsiveness clearly matters for lots of market analyses Why not just look at slope Want to compare across markets inter market Want to compare within markets intra market slope can be misleading want a unit free measure 2 Why Economists Use Elasticity An elasticity is a unit free measure By comparing markets using elasticities it does not matter how we measure the price or the quantity in the two markets Elasticities allow economists to quantify the differences among markets without standardizing the units of measurement 3 What is an Elasticity Measurement of the percentage change in one variable that results from a 1 change in another variable Can come up with many elasticities We will introduce four three from the demand function one from the supply function 4 2 VIP Elasticities Price elasticity of demand how sensitive is the quantity demanded to a change in the price of the good Price elasticity of supply how sensitive is the quantity supplied to a change in the price of the good Often referred to as own price elasticities 5 Examples of Own Price Demand Elasticities When the price of gasoline rises by 1 the quantity demanded falls by 0 2 so gasoline demand is not very price sensitive Price elasticity of demand is 0 2 When the price of gold jewelry rises by 1 the quantity demanded falls by 2 6 so jewelry demand is very price sensitive Price elasticity of demand is 2 6 6 Examples of Own Price Supply Elasticities When the price of DaVinci paintings increases by 1 the quantity supplied doesn t change at all so the quantity supplied of DaVinci paintings is completely insensitive to the price Price elasticity of supply is 0 When the price of beef increases by 1 the quantity supplied increases by 5 so beef supply is very price sensitive Price elasticity of supply is 5 7 Examples of Unit free Comparisons Gasoline and jewelry It doesn t matter that gas is sold by



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