ECON 221 1st Edition Lecture 7 Outline of Last Lecture I. How Supply and Demand Determine Prices (cont.)a. How a Decrease in Supply Affects Equilibriumb. How an Increase in Demand Affects Equilibriumc. A Shift in both Supply and DemandOutline of Current LectureI. ElasticityII. Determinants of the price elasticity of demandIII. Calculating Percentage ChangesIV. Calculating the Price Elasticity of DemandCurrent LectureChapter 5: Elasticity and Its ApplicationsElasticity:- Ex. Suppose you design websites for local businesses.- Sell 12 websites per month; charge $200 per website- Suppose your cost rises and you raise the price to $250.- How much less would you sell? Would your revenue increase or decrease?- Elasticity measures how much one variable responds to changes in another variable- Numerical measure of the responsiveness of Qs or Qd to one of its determinants- Price elasticity of demand: measures how much the quantity demanded responds to a change in price- = pc. change in quantity dd./pc. change in price- Elastic or Inelastic demand for a goodDeterminants of the price elasticity of demand:- Availability of close substitutes - Necessities vs Luxuries- Definition of a market- Time horizonThese 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.Calculating percentage changes:- We use the midpoint method:- End value-start value x 100- Midpoint- Midpoint is the midpoint or the average between the two values- It doesn’t matter which value you choose as the start or the end: you get the same answer!Calculating the Price Elasticity of Demand:- Ex.Use the following information to calculate the price elasticity of demand for hotel rooms:- If P= $70, Qd=5000- If P= $90,