USC ECON 203 - C6 (11 pages)

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C6



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C6

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Pages:
11
School:
University of Southern California
Course:
Econ 203 - Principles of Microeconomics
Principles of Microeconomics Documents

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ECON 203 Principles of Microeconomics Class 6 Price Elasticities of Demand and Supply 1 Knowledge Recap Simultaneous events that produce a shift in both the demand and supply curves have an ambiguous effect on either equilibrium price or equilibrium quantity Example the increase in both demand and supply for the Rams tickets lead to an increase in quantity but an unknown effect on prices In those cases the final effect on equilibrium price or quantity will be determined by The magnitude of the shifts of demand and supply How much will buyers and sellers respond to the demand and supply changes elasticities of demand and supply 2 Elasticity Elasticity is a measure of how much buyers and sellers respond to changes in market conditions The response of buyers and sellers to changes in prices is measured by price elasticities of demand and supply Determines the shape slope of the demand and supply curves 3 Elasticity of Demand Price elasticity of demand Measures the percent changes in quantity demanded as a response to a 1 change in the price of a good The demand for a good is said to be elastic when a change in price leads to a large change in quantity demanded The demand for a good is said to be inelastic when a change in price leads to a small change in quantity demanded 4 Elasticity of Demand Price elasticity of demand reflects buyers preferences Factors that affect the price elasticity of demand Availability of close substitutes goods with more available substitutes have more elastic demands Necessities vs luxuries necessities have more inelastic demands while luxuries have more elastic demands Definition of the market narrowly defined markets have more elastic demands while broadly defined markets have more inelastic demands Time horizon as the time horizon becomes longer demand becomes more elastic 5 Computing Elasticity of Demand Midpoint formula Solves the problem of the difference in base number depending on the direction of the change Example Price 10 8 6 4



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