ECON 110 Lecture 9 Outline of Last Lecture I. Introduction to ElasticityOutline of Current Lecture I. Clicker ReviewII. Interpretation of Price Elasticity of DemandIII. Elasticity in Extreme Valuesa. Perfect Elasticityb. Perfect InelasticityIV. Elasticity of Demand in context of sellers.a. Response to Inelastic Situationsb. Response to Elastic SituationsV. Elasticity of IncomeVI. Cross Price ElasticityCurrent Lecture: Elasticity continuedClicker Question ReviewCalculate the price elasticity of demand for business travelers, when the original price is $200 and increases to $250, and the quantity demanded (in tickets) decreases from 2,000to 1,900. 1. -4.3 2. -.43 3. -.22 Answer: 3. ED = %change in quantity demanded/%change in price = ((1900-2000)/1950)/((250-200)/225) = (-100/1950)/(50/225) = (-0.0513)/(0.2222) = -0.22Note: The method used above is termed the Midpoint Method, because both the numerator and the denominator are divided by two, representing the midpoint between the starting and ending values. This value will always be negative.Interpretation of price elasticity of demand: - A large value, (implying that it is greater than 1) implies that the elasticity value is elastic.These 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.- A small value, or value less than 1, is known as inelastic.- The value can range from 0 to -∞ .Elasticity Values at the extremes - On a graph of a price elasticity of demand, a horizontal, or nearly horizontal line indicates perfect elasticity.o No matter how quantity demanded changes, price does not, and one can infer that upon a change in price, buyers will either decide that they do not need the product, or will buy a substitute. o For example, bottled water products are perfectly elastic, since they are essentially the same. There are so many substitutes that a change in price simply causes buyers to buy a substitute.- A vertical line, however, indicates perfect inelasticity. o No matter how the price changes, demand will not change.o This suggests a normal, or essential good that has few or no substitutes, such as food. Buyers use the concept of elasticity, but they don't need to understand it. However, sellers live and die by choices they make surrounding elasticity. - If he price goes up by more than the quantity falls, then the expenditure goes up. What would the value of the elasticity be relative to one in this case? Less than one, suggesting that the product is inelastic, and raising the prices will bring an increase in revenue.- When the price elasticity of demand is great than one, the indication is that an increase in price would cause a greater decrease in demand, and a loss of revenue. In order to increase revenue in an elastic situation, buyers must decrease prices.Income elasticity is the response, of demand, to changes in income, or, percent change in quantity demanded, divided by percent change in income.- EI = %∆QD / %∆ I- This again is the Midpoint Formula, with values ranging from -∞ to +∞ . - Positive values denote normal goods.- Negative values denote inferior goods.Cross price elasticity measures the impact of related goods on the demand for another good.- %∆ of Quantity Demanded of x divided by %∆ of price of y- Impact of change in price of y on demand for x- Positive values indicate a substitute relationship.- Negative values indicate a complementary