ECON 202 1nd Edition Lecture 11 Outline of Last Lecture I. Comparative Statics (continued)II. Elasticitya. Elasticity of DemandOutline of Current Lecture III. Elasticitya. Price Elasticity of Demandi. Determinants of Price Elasticity of Demandb. Other Demand ElasticitiesCurrent LectureElasticityPrice Elasticity of DemandED=|% ∆ QD% ∆ P|If,ED > 1 then demand is elastic, or very sensitive to changes in price, or % Δ QD > % Δ PED = 1 then demand is unitary elastic, or % Δ QD = % Δ PED < 1 then demand is inelastic, or not sensitive to changes in price, or % Δ QD < % Δ PChanges in Total Revenue depends on elasticityElastic means that the graph of Total Revenue increasesInelastic means that the graph of Total Revenue decreasesTotal Revenue TestIf: Demand is elastic then price increases as Total Revenuedecreases (inverse relationship) and vice versaThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. PQTotal RevenueQMidpointElasticInelasticIf: Demand is inelastic then price increase as total revenue increases (direct relationship) and vice versaDeterminants of Price Elasticity of Demand1. Number and availability of Substitutesa. The more substitutes there are, the more elastic demand isi. Can depend on how the good is definedExample: There are multiple substitutes for the brand of toothpaste, Crest. However, there are few substitutes for the product toothpaste.2. Luxuries vs. Necessitiesa. Luxuries tend to be elasticb. Necessities tend to be inelasticExample: Heroin is a necessity for Heroin Addicts. The goal of the United States is toreduce Heroin supply (War on Drugs) so that there are few Heroin addicts.However, because heroin is an inelastic good, even if the supply of heroindecreases a lot, the demand for heroin doesn’t decrease by very much. Thehigher price then leads heroin addicts to rob people, thus raising crimerates.3. Share of a Consumers Budget Spent on a Gooda. The greater the share of a consumers budget the good takes up, the MOREELASTIC the demand for that goodExample: If the price of bubble gum doubles, it probably won’t effect your demand for bubble gum too much, however, if your rent doubles, you might have to downsize, or find an extra roommate.4. Timea. Longer a price change remains in effect the more elastic the demand becomes for that goodExample: If the price of a toy doubles, but only for one day, the demand for that toy is less likely to change than if the price of the toy doubled for a yearOther Demand ElasticitiesCross Price Elasticity of Demand – relates how sensitive the quantity demand of one good, X, is to a change in price of another good, Y.DS1S2P2P1Q2Q1EC=% ∆ QDX% ∆ PYIf: EC > 0 then as the price of Y increases, the quantity demanded of X increases (substitutes)If: EC < 0 then as the price of Y increases, the quantity demanded of X decreases (compliments)Income Elasticity of Demand – relates how sensitive the quantity demanded of a good is to changes in consumer incomesEY=% ∆ QD% ∆ IncomeIf: EY > 0 then as income increases, the quantity demanded increases (normal goods)If: EY < 0 then as income increases, the quantity demanded decreases (inferior
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