Econ 2023 1st Edition Lecture 7 Outline of Last Lecture I. Changes in the marketa. Shift v movementsII. Price controlsa. Price floors b. Price CeilingsIII. Other factors and wrapping chapter three up.Outline of Current Lecture II. Elasticity of DemandA. Definition of elasticity of demandIII. What the elasticity shows us and how to find it.IV. Determinants of Elasticitya. Time horizon, classification, nature, and size.Current Lecture5. Elasticity of Demand: the law of demand tells us that when price goes up, quantity demandedgoes down and vice-versa. This will answer the question: how much does quantity demanded change when price changes?a. A demand curve is said to be elastic when as increase in price reduces the quantity demanded a lot (and vice versa) b. When the same increase in price reduces quantity demanded just a little, then the demanded curve is said to be INELASTIC. 6. The elasticity of demand is going to be a measure of how responsive for the quantity demanded is to a change to the price. a. Elastic: on the demand curve where the quantity demanded is responsive to the price.b. Inelastic: on the demand curve where the quantity demanded isn’t responsive or less responsive to the price.c. Elasticity doesn’t equal slope but: if two linear demand (or supply) curves run through a common point, then at any given quantity the curve that is FLATTER is more ELASTIC.7. Determinants of the Elasticity of 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.a. Availability of Substitutes*** this is the fundamental determinant. The more substitutes the more elastic the curve. It strongly influences the sensitivity to changes in price.i. For goods with many substitutes, switching brands when prices change is easy, so demand is elastic.ii. For goods with fewer substitutes, consumers find it hard to adjust quantity demanded much when prices change so demand is inelastic. b. Time horizon influences elasticity of demand for a good: immediately following a priceincrease, consumers may not be able to alter their consumption patterns (inelastic), overtime, however, consumers can adjust their behavior by finding substitutes (making demand elastic.)c. The classification of the good influences the elasticity of demand for a good (broad and narrow): The broader the classification, the less likely consumers will be to finding a substitute (inelastic), the narrower the classification, the more likely the consumer will be to find substitutes (making demand elastic).d. The nature of the good to the consumer can also affect the elasticity of demand. For necessities, consumers do not change quantity demanded much when the price changes(inelastic). For luxuries, consumers will alter their behavior when the price rises (elastic).e. The size of the purchase (relative to the consumer’s budget) influences elasticity of demand: Consumers are less concerned about price changes when the good feels cheap (inelastic). Consumers become much more concerned about price change when the good feels expensive