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UA EC 110 - Elasticity
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ECON 110Lecture 8Outline of Last Lecture I. Review of Exam 1II. Review of old materialOutline of Current Lecture I. Clicker Review question on Equilibrium calculationsII. The Economics of Valentines DayIII. Elasticity: Measuring the response in the marketa. Demand Elasticity: Price Elasticity, Income Elasticity, Cross-Price Elasticityb. Supply Elasticity: Price Elasticityc. Examplesd. Surge Pricinge. Elasticity vs. Cost Differencesf. Elasticity Equationi. Equationii. Exampleg. 3 Factors i. Timeii. Substitutesiii. SignificanceCurrent LectureClicker Question The market for a six pack of Dasani bottled water is composed of the following equations: Demand equation Qd = 160 – 40P and Supply equation Qs = -90 + 60P . Find the equilibrium quantity.1. 2.502. 603. 4Answer: 60To find the equilibrium quantity, set QD equal to QS , achieving the equation160 – 40P = -90 + 60PThese 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.Solving for P, you find P = 2.50, which is the equilibrium price. Plug that P into either Q equation to solve for the equilibrium quantity. QS = -90 + 60P = -90 + 60 (2.50)Qs = -90 + 150 = 60Lecture:The economics of Valentine’s DayWhat is the price of a dozen roses? Normally, it’s probably $30 or $40. During Valentine’sDay, however, prices shoot to near $70 or $80, because people are willing to pay more. This is elasticity of the market at its finest.Elasticity measures exactly how responsive the market is to changes in important factors. For example Elasticity would measure the response to higher demand for roses during Valentine’s Day. Another example: Assuming you drive a car regularly, how do you respond when the price of gas goes up? You might search for lower prices instead of buying where it’s convenient. You may consider selling your current vehicle and buying a more fuel-efficient car. This is you adjusting to a change in a factor of the market, price.Here’s another concept: Surge Pricing. When demand goes up, prices automatically go up. For example, on New Year’s Eve, everybody suddenly wants an UBER car because they don’t want to drive home drunk. And because they are drunk, they are willing to pay more. UBER will in turn raise prices like crazy because there will be a guaranteed surge of business regardless.Let’s talk about Elasticity versus Cost Differences. A coffee shop that charges ten cents more per cup to dine-in with coffee than for to-go coffee, is probably more likely adjusting for the cost difference in whether they have to wash a cup. However, Keurig making really expensive K cups is elasticity, because it is a specialized product for their machine that they know that people are willing to pay for regardless. But if you do the math on how much K cups cost, you are actually paying near $60 per pound of (needless to say, crappy) coffee! Not even really expensive Kona coffee costs that much!Elasticity, just like demand and supply, has its own equation. This equation states that the elasticity of demand will be equivalent to the percent change in quantity, divided by the percent change in price.Price Elasticity of Demand: Ԑd = %∆Quantity = (Q1 – Q2)/((Q1 + Q2)/2)%∆Price (P1 – P2)/((P1+P2)/2)Lastly, there are three factors in determining elasticity value:1. Time: How long does a household have to adapt to the change in the price?2. Substitutes: Are there any close substitutes for this product; are there many of these substitutes?3. Significance: How large of a proportions of a household’s budget is spent on the


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UA EC 110 - Elasticity

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