Elasticity Responsiveness of 1 variable to another Elasticity of A with respect to B change in A change in B Price Elasticity of Demand Responsiveness of quantity demanded to changes in price Contrasting Demand Curves Extremely responsive Qd spans over large set Price is small range Qd is extremely elastic small price change leads to huge change in Qd Not Responsive huge price change does not cause huge change in Qd Approaching the Extreme completely flat line Types of Elasticity Perfectly Elastic 1 Very small change in price means you lose all of your business straight horizontal line EX extreme competition product exactly the same nothing unique about different producers product consumer is informed perfect info easy to go from one business to another and compare If you do not change your price to match competitors you won t have any business 2 Quantity demanded does not respond at all to a price change straight vertical line Perfectly Inelastic Interpreting Elasticity Results If n 1 then relatively inelastic If n 1 then unitary elastic If n 1 then relatively elastic Calculating Elasticity Proceed with Caution More complicated than it looks Just use slope right Slope rise run We want DQd DP One more thing when we work with price elasticity of demand we use the absolute value Be consistent cid 127 cid 127 cid 127 See the problem Slope won t work because we want run rise What about slope s reciprocal We want DQd DP DQd 1 2 DP 400 200 DQd DP 0 005 this would be relatively inelastic We use diff units DQd 12 24 DP 4 2 DQd DP 6 this would be elastic This is too unitary sensitive Price of Elasticity of Demand change in Qd change in P change in Q Q2 Q1 Q1 2 1 1 1 change in P P2 P1 P1 400 200 400 change in Qd change in P 2 Determinants of Elasticity Availability of substitutes substitute corn for corn at lower price but no difference in quality Relative size of budget 25 more for gum no change 25 more for computer big change Necessities vs Luxuries Ice cream luxury Gas to get home necessity elasticity luxuries Definitions of the Market how narrow or broad narrow easy alternatives broad not many alternatives Time Horizon SUV bad mileage gas p inc new car move carpool if you have time shorter time less flexibility inelastic alternatives are harder to find n cid 127 cid 127 cid 127 cid 127 cid 127
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