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 priceContrasting 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 QdNot Responsive- huge price change does not cause huge change in QdApproaching the Extreme completely flat lineTypes of Elasticity 1) Very small change in price means you lose all of your business-straight horizontal line Perfectly Elastic 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 InelasticOne more thing.. when we work with price elasticity of demand we use the absolute value (Be consistent)Interpreting Elasticity Results• If ■<1, then relatively inelastic• If ■=1, then unitary elastic• If ■>1, then relatively elasticCalculating ElasticityProceed with Caution: More complicated than it looksJust use slope, right? Slope= rise/run We want ∆Qd / ∆PSee the problem? Slope won't work because we want run/riseWhat about slope's reciprocal? We want ∆Qd / ∆P ∆Qd= 1-2 ∆P= 400-200 ∆Qd/∆P= -0.005 this would be relatively inelastic We use diff units ∆Qd= 12-24 ∆P= 4-2 ∆Qd/∆P= -6 this would be elastic This is too unitary sensitivePrice 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 = ½%change in Qd / %change in P= 2Determinants 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)
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