ECONS 101 1st Edition Lecture 12Outline of Last Lecture I. ElasticityOutline of Current Lecture I. Price Elasticity of Demanda. Determinants of Price Elasticity of Demandb. Rules of PEDII. Income Elasticity of Demand (IED)Current LecturePrice Elasticity of Demand (PED): A measure of a particular portion of the demand curve.- PED is a local measure, calculated using % change.- Slope is a global measure, calculated using change.oPED=% Change∈Qd% Change∈ PDeterminants:- Availability of close substitutes:o More substitutes  more elastico Less substitutes  less elastic- Timeo Consumers adjust their buying habits.o As time passes, PED becomes more elastic.o Substitutes and more supply.- Definition of the marketo A narrowly defined market is more elastic than a broader market.o Gas station in a small town vs. gas station in a big city.  Which can change prices without affect demand that much?- Luxury vs. necessityo Luxuries are more elastic; a choice you can do without.o Necessities are less elastic- Share of income spent on goodo Salt vs. blendero Food vs. alcoholic beveragesThese 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.o Goods that are a small fraction of income are less elastic. But if it is a necessity…?Rules of thumb for PED- Always negative  consistent with the Law of Demand.- Price cut, initial price is greater than ending.o % change P is negative.o % change in Q is positive.- Price hike, initial price is lower than ending.o % change in P is positive.o % change in Q is negative.- When comparing PED across goods, use the absolute value, that is drop the minus sign:o A value of -3 is smaller than -2, but a PED of |-3| is larger than |-2|.Income Elasticity of Demand (IED):- Intuition helps define the sign of the IED based on the direction in Quantity Demanded:o Normal Good: as Income ↑, Quantity Demanded ↑o Inferior Good: as Income ↑, Quantity Demanded ↓o Luxury Good: as Income ↑, Quantity Demanded ↑o Necessity Good: as Income ↑, Quantity Demanded ↑-IED=% Change∈Qd% Change∈IncomePrice Elasticity of Supply (PES):-PES=% Change∈Qs% Change∈ PDeterminants of PES:- The ability and willingness of firms to alter the quantity they produce as price changes.- Availability of inputso More available  more elastic- The time it takes to shift or change production.o Short-term 