ECON 100A Lecture Notes - Lecture 11: Demand Curve, Substitute Good
Document Summary
Demand curves don"t have to be linear. A special case: elasticity the same at every point along curve. Q=ap , that function will have constant elasticitty vertical demand curve: perfectly inelastic ( = 0) everywhere: essential good horizontal demand curve: perfectly elastic (-infinity): perfect substitutes. Germans used 170 million paper straws, britons 160 million and the french 100 million. Perhaps french government wants citizens to switch from plastic straws. How much do french have to subsidize (lower price of paper straws) to increase sales to. Instead, we"ll do a back-of-the-envelope calculation: assume there is a constant elasticity demand curve for paper straws: Normalize current cost to 1 (p = 1) Therefore, if q = 100m, then a = 100m. With very elastic demand (elasticity = -10) a 5% decrease in the price will lead to the quantity going up by 70% (100 to 170 million) With elasticity of -5, we need 10% decrease in price.
