Econ 201 1st Edition Lecture 15Outline of Last Lecture 1.elasticityOutline of Current Lecture 1.magnitude of elasticity2.Determinant of elasticity3.Total RevenueCurrent LectureInterpreting Magnitudes of Elasticity• Income Elasticity of Demand:EM> 0 è normal goodEM< 0 è inferior goodEM > 1 è luxury good (also normal)0 <EM <1 è normal and necessity• Cross-Price Elasticity of Demand:EXY> 0 è X and Y are substitutesEXY< 0 è X and Y are complementsDeterminants of Price Elasticity of Demand• Key issue: How can buyers meet their consumption goals?1. Necessity v. LuxuryThese 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.Less “necessary” è more elastic Example: sailboats v. doctor visits Sailboat demand is more elastic.2. Availability and closeness of substitutesMore substitutes and better substitutability è more elasticExample: butter v. eggs Butter demand is more elastic.3. Definition of marketMore narrow definition è more elasticExample: eggs v. food Eggs demand is more elastic.4. Time horizonLonger time horizon è more elastic Long run demand is more elastic.More time allows more substitution possibilities.Summary: Determinants of Price Elasticity of Demand• Key issue: How can buyers meet their consumption goals?1. Necessity v. LuxuryLess “necessary” è more elastic 2. Availability and closeness of substitutesMore and closer substitutes è more elastic3. Definition of marketMore narrow definition è more elastic4. Time horizonLonger time horizon è more elasticPrice Elasticity of Demand & Total Expenditure (Revenue)• Total Expenditure is the product ofP and Q: TE = PxQFor equilibrium shifts along a Demand curve, P and Q move in opposite directions.Whether TE will follow P or follow Q (moving opposite of P) depends on the relative strengths of P and Q in their influence on TE. • Elasticity answers the question of which influence dominates.• Inelastic Demand (–1 <ED< 0): TE follows P and moves opposite of Q. So expenditure rises if P increases, even though less is purchased.• Elastic Demand (ED< –1): TE follows Qand moves opposite of P. So expenditure falls if P increases, because less is
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