ECON 202 1st Edition Lecture 7 Outline of Last Lecture II Modules 13 and 14 III Price and Quantity Controls Outline of Current Lecture IV Elasticity V The Midpoint Method VI Real World Elasticity Current Lecture Elasticity measures responsiveness of demand Substitution Effect sandwich burger and pizza Price declines you switch to buy the cheaper products 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 Income Effect As prices decline you feel wealthier Example Housing P1 1500 and P2 1000 Housing gasoline bigger purchases fall under this category Can the Demand Curve Ever Slope Up Giffen Good This could only ever happen with an inferior good Income effect for inferior good that takes up a large portion of income Price of Potatoes Increases Income effect you feel less wealthy substitute away from other goods now that the money has depleted Elasticity How does X Quantity change with Y Price Price Decreases 10 and Quantity Increases 20 Change in Q Change in P Use Percentage Changes Change in Quantity Change in Price ELASTICITY Example Elasticity from A B 4 Change in Quantity New Value Old Value Old Value 20 10 10 1 Change in Price New Old Old 12 16 16 4 16 25 ED 1 25 4 or 4 Elasticity is always negative so you don t always need to have the negative sign ED if price increases by 1 than quantity will decrease by X Elasticity from B A 2 33 Change in Quantity New Value Old Value Old Value 10 20 5 Change in Price New Old Old 4 12 1 3 ED 5 33 1 5 The Most Complicated Math you will have to deal with The Midpoint Method ED Q2 Q1 Q1 Q2 2 P2 P1 P1 P2 2 ED 20 10 10 20 2 12 16 12 16 2 ED 10 15 4 14 2 33 A 1 Change in Price will lead to a 2 33 Change in Quantity Real World Elasticities 1 Eggs 0 1 Price goes up 1 Quantity of eggs goes down 0 1 2 Beef 0 4 3 Gas 0 5 These goods are known as inelastic goods because the ED 1 1 Housing 1 2 2 Meals Out 2 3 3 Foreign Travel 4 1 These goods are known as elastic goods because ED 1