MAE101 Lecture Notes - Lecture 3: Economic Surplus, Marginal Cost, Ceteris Paribus
Document Summary
A measure of how much buyers and sellers respond to changes in market conditions allows for analysis of supply, demand and changes in market equilibrium with greater precision. A measure of how much the quantity demanded of a food responds to a change in price of that good, ceteris paribus. It is measured by the percentage change in quantity demanded divided by the percentage change in price along the same demand curve. Is >1 demand is elastic (any change in price, high change in quantity demanded) Is <1 demand is inelastic (any change in price, low change in qty demanded) Availability of close substitutes ( more -> elasticity tends to be higher) Necessities versus luxuries (luxuries" tend to be more elastic) Definition of the market (narrower definition more elastic - apples vs fruit) Time horizon (more elastic over long time horizons) Another extreme case: fully vertical demand curve (e) perfectly elastic demand: price elasticity equals infinity.
