Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Slide 50Slide 51Slide 52Slide 53Slide 54Group-Clicker Question (1 pt): What is the best verbal interpretation of x1,p10%0%ECON 410 Elasticity1. The percent change in demand for good 1 that results from a percent change in the price of good 1.2. The percent change in the price of good 1 that results from a percent change in the demand of good 1.“The only valid thing in art is the one thing that cannot be explained. To explain away the mystery of a great painting would do irreplaceable harm, for whenever you explain or define something you substitute the explanation or the definition for the”– Henri Matisse2Class 12 - Income & Substitution EffectsIf you didn’t do as well as you had hoped, please don’t panic.If you didn’t do as well as you had hoped, please don’t panic.3Class 12 - Income & Substitution EffectsIf you didn’t do as well as you had hoped, please don’t panic.If you didn’t do as well as you had hoped, please don’t panic.4Class 12 - Income & Substitution EffectsIf you didn’t do as well as you had hoped, please don’t panic.If you didn’t do as well as you had hoped, please don’t panic.http://tinyurl.com/MR-HW-Approach5Class 12 - Income & Substitution EffectsIf you didn’t do as well as you had hoped, please don’t panic.If you didn’t do as well as you had hoped, please don’t panic.http://tinyurl.com/MR-Test-Taking-Skills6Class 12 - Income & Substitution EffectsYou can look at the Multiple Choice packets & the correct answers in the EIM sessionsYou can look at the Multiple Choice packets & the correct answers in the EIM sessions7Class 12 - Income & Substitution EffectsIf you’d like to look at YOUR work or talk strategies, Rayan will be available:Th: 5pm-8pm GA04F: 9am-12am GA04If you’d like to look at YOUR work or talk strategies, Rayan will be available:Th: 5pm-8pm GA04F: 9am-12am GA048Class 12 - Income & Substitution EffectsRegrade Requests due a week from todayRegrade Requests due a week from today9HW4 Due Next Thursday (3/6)HW4 Due Next Thursday (3/6)Class 12 - Income & Substitution Effects10Individual ChoiceIndividual ChoiceWhat you wantWhat you wantFoundationFoundationStructureStructurePatternsPatternsWhat you can haveWhat you can haveBudget SetBudget SetBudget LineBudget LineWhat you will chooseWhat you will chooseOptimal BundleOptimal BundleBehavior ChangesBehavior ChangesFirm ChoiceFirm ChoiceGame TheoryGame TheoryClass 12 - Income & Substitution Effects�11Class 12 - Income & Substitution EffectsElasticityA,B1. A,B2. “Elasticity of A with respect to B”3. “B Elasticity of A”•The percent change in A that results from a percent change in B.12Class 12 - Income & Substitution EffectsElasticityA,B1. A,B2. “Elasticity of A with respect to B”3. “B Elasticity of A”•The percent change in A that results from a percent change in B. • %%ABVV13Class 12 - Income & Substitution EffectsAB10%20%10%-20%,%%BAAB=VV�2=-14Class 12 - Income & Substitution EffectsElasticityA,BDefinition of %Fractions%%ABVVAABB=VVA BB A=VVGroup-Clicker Question (P): Recall . If an individual studies 4 hours per day for their midterm, they will get an 80. If an individual studies 6 hours per day for their midterm, they will get an 85. What is the individual’s elasticity of midterm grade with respect to hours per day studying? For A and B, use the original values.1. 1/82. 23. 54. 8,A BA BB A=VV�16Class 12 - Income & Substitution EffectsGroup-Clicker Question (P): Recall . If an individual studies 4 hours per day for their midterm, they will get an 80. If an individual studies 6 hours per day for their midterm, they will get an 85. What is the individual’s elasticity of midterm grade with respect to hours per day studying?,A BA BB A=VV�17Class 12 - Income & Substitution EffectsIntuitively, tells us how much a percent change in B will “scale” as it causes a change in A. ,A B�,%Δ%ΔA BAB=�,%Δ %Δ *A BA B= �Group-Clicker Question (P): Recall . If , how will a change in B affect A?1. A change in B causes a more than proportionate change in A.2. A change in B causes a less than proportionate change in A.3. A change in B causes an exactly proportionate change in A.,%Δ%ΔA BAB=�,| | 1A B>�19Class 12 - Income & Substitution EffectsA,B > 1Elastic: A percent change in B results in a larger percent change in A. For instance, a 10% increase in prices causes a 20% reduction in sales (|x,p| > 1).Price Quantity,%Δ %Δ *A BA B= �Group-Clicker Question (P): Recall . If , how will a change in B affect A?1. A change in B causes a more than proportionate change in A.2. A change in B causes a less than proportionate change in A.3. A change in B causes an exactly proportionate change in A.,%Δ%ΔA BAB=�,| | 1A B<�21Class 12 - Income & Substitution EffectsA,B < 1Inelastic: A percent change in B results in a smaller percent change in A. For instance, a 20% increase in prices only causes a 10% reduction in sales (|x,p| < 1).Price Quantity,%Δ %Δ *A BA B= �22Class 12 - Income & Substitution EffectsElasticityA,B•If |A,B |> 1, then a change in B causes a more than proportionate change in A. We call this elastic.• If |A,B |< 1, then a change in B causes a less than proportionate change in A. We call this inelastic.•If |A,B |= 1, then a change in B causes an exactly proportionate change in A. We call this unit elastic.Group-Clicker Question (P): Recall . If , how will a change in B affect A?1. If B increases, A will decrease (and vice versa).2. If B increases, A will increase.3. If B decreases, A will decrease.4. If B increases, A will stay the same.,%Δ%ΔA BAB=�,0A B<�24ElasticityA,B•The magnitude of A,B tells us whether the effect of B becomes “magnified” (|A,B |> 1) or “dampened” (|A,B |< 1) as it changes A.•The sign of A,B tells us whether A moves in the same direction (A,B > 0) or the opposite direction (A,B