Less ElasticMore ElasticLess ElasticMore ElasticLecture Outline – Elasticity and Its ApplicationsElasticity- measures sensitivity of one variable in response to a change in the other1. Price Elasticity of Demand (book refers to it as the “elasticity of demand”)· What does the price elasticity of demand measure?o Measure of how responsive the quantity demanded is to a change in priceo How does a change in price impact quantity demandedo More responsive equals more elastico Steeper curve= less elastico Flatter curve= elastic because its more elastico Very elastic if there is a large change in quantity given a percent change in priceo Very inelastic if given a percentage change in price, there is a small change in quantity· How is the price elasticity of demand calculated? · Elactisity of demand = Percentage change in quantity demanded / Percentage change in priceo How a change in denominator effects change in the numerator. Value of price of elasticity of demand will be negative because if price increases, consump-tion will fall and vice versa.o percent change in price is the actual change over the average of the two num-bers times 100 (same for percent change in demand)o Why is the midpoint formula used? to get the average1o Explain why the price elasticity of demand changes along a linear demand curve.· What do we mean when we say the price elasticity of demand is elastic? Inelastic? Unit elastic? Perfectly elastic? Perfectly inelastic? What is the value of the price elasticity of demand for these different types of elasticities?o Elastic demand= elasticity of demand is greater than 1o Inelastic demand= Elasticity of demand is less than 1o Unit-elastic demand= elasticity of demand is equal to 1o Perfectly Elastic= at a given price, demand changed at every quantity (very sensitive)o Perfectly Inelastic= at a given quantity, people will pay any price, there is no change.· What are the 5 factors that make the elasticity of demand more elastic? Less elastic? (Note: we also refer to these factors as the “determinants of the elasticity of de-mand.”) Give an example of each.o Price elasticity will be higher when close substitutes are availableo Price elasticity is higher in the long run than in the short run. People will be more responsive in the long run because there is time to make changeso Price elasticity is higher for narrowly defined goods than broadly defined ones( ex. Blue jeans is broad-switch to khakis, clothing is narrow-nothing to substitute) consumption falls for jeanso Price elasticity is higher for luxuries than for necessitieso Price elasticity is higher for goods that are a large part of your bedget. Ex cigaretts are a large part of budget given their income. Small increase in price causes college student to buy less- decrease in consumption. For working 2adult, relative to budget, cigarettes are a small purchasee- making them less elastic.Less Elastic More ElasticFewer substitutes More substitutesShort run (less time) Long run (more time)Categories of product Specific brandsNecessities LuxuriesSmall part of budget Large part of budget· Define total revenue. How is total revenue calculated? o Total Revenue: Total amount earned for selling something Calculated by Price X Quantity. Total Revenue=Price x Quantityo Explain what happens to total revenue if the market price increases/decreases along the inelastic portion of the demand curve? When demand is inelastic, a price increase causes revenue to increase A price decrease causes revenue to decreaseo Explain what happens to total revenue if the market price increases/decreases along the elastic portion of the demand curve? When demand is elastic, a price increase causes revenue to fall A price decrease causes revenue to increaseo Explain what happens to total revenue if the market price increases/decreases along the unit-elastic portion of the demand curve? A change in price is matched by an equal and opposite percentage change in quantity demanded so revenues stay the same. Nothing happens.32. Other Demand Elasticities· What does the income elasticity of demand measure? How is it calculated?o Measures how much the quantity demanded of a good responds to a change inthe consumer’s incomeo What does a positive/negative value of the income elasticity of demand sug-gest about the type of good? income Elasticity is greater than 0= normal good income elasticity is less than 0= inferior goodo What does it mean if we say that the income elasticity of demand is income inelastic? Give an example of a good that is income inelastic? Goods consumers regard as necessities are inelastic. Food, fuel, cloth-ing, utilities, medical services When income increases or decreases, consumption would not increase or decrease very much because the good is a necessityo What does it mean if we say that the income elasticity of demand is income elastic? Give an example of a good that is income elastic? Luxury goods are income elastic· Sports cars, furs, expensive foods, cruises· What does the cross-price elasticity of demand measure? How is it calculated?o A measure of how much the wuantity demanded of one good responds to a change in the price of another good. How does good b change consumption ofgood a4 Cross-Price Elasticity of Demand= Percentage change in quantity de-manded of good A / Percentage change in the price of good Bo What does a positive/negative value of the cross-price elasticity of demand suggest about the type of good? If value of elasticity is positive= A and B are substitutes If value of elasticity is negative, < 0, A and B are complimentsPrice Elasticity of Supply (book refers to it as the “elasticity of supply”)· What does the price elasticity of supply measure?o Measures how responsive the quantity supplied is to the change in priceMore responsive = more elastic· How is the price elasticity of supply calculated? o Elasticity of Supply = Percentage change in quantity supplied / Percentage change in Price· What do we mean when we say the price elasticity of supply is elastic? Inelastic? Unit elastic? Perfectly elastic? Perfectly inelastic? What is the value of the price elasticity of supply for these different types of elasticities?o Price elasticity of supply is always positiveo If Elasticity is greater than 1 - elastico If elasticity is less than 1 - inelastico If Elasticity is = to 1 - unity-elastic supplyo Perfectly inelastic supply