ECON 201 1nd Edition Lecture 9 Outline of Current Lecture I Price Elasticity II Calculating Elasticity III Elasticity and Supply and Demand Curves Outline of Current Lecture I Substitution and Elasticity II Elasticity Total Revenue and Demand III Other Elasticity Concepts IV Clicker Questions Current Lecture 1 Substitution and Elasticity a As a general rule the more substitutes a good has the more elastic is S and D i Demand 1 Time the larger the time interval considered the more elastic a Ex OPEC raises price 45 in 1973 74 but quantity demanded drops only 8 2 Luxury vs Necessity inelastic a Ex Restaurant meal vs home cooking i Prescription drug vs aspirin 3 Market definition the narrower the definition the more substitutes the more elastic b The longer the time period considered the more elastic the supply c The reasoning is the same as for demand i In the long run there are more options for change so it is easier 2 Elasticity Total Revenue and Demand a Total Revenue equals total quantity sold multiplied by price of good TR PQ b Price Discrimination occurs hen a firm separates the people with less elastic demand from those with more elastic demand These 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 i Airline tickets ii Buying hardback vs paperback books iii Sam s club 3 Other Elasticity Concepts a Other elasticities can be useful in specifying the effects of a shift factor of demand i Income elasticity of demand the percentage change in demand divided by the percentage change in income 1 Normal good Ei 0 2 Luxury good Ei 1 3 Necessity good Ei 1 4 Inferior good Ei 0 ii Cross price elasticity of demand the percentage change in demand divided by the percentage change in the price of another good 1 Substitute Exy 0 4 Clicker Question When should a supplier raise price a The supplier should raise his price when it faces an inelastic demand i Total revenue increases with a price increase because quantity drops proportionally less than price goes up ii Since costs also fall profit rises iii Ed 1 so increase P will increase TR
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