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2012.09.25 - Elasticity.docx

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McGill University
Agricultural Economics
AGEC 200
Anwar Naseem

Elasticity - Changes in price might change demand of something - Higher price = lower demand, but higher amount paid for each product so many still earn same revenue...don’t know amount - Basic idea: measures how much one variable responds to changes in another variable - Elasticity: numerical measure of responsiveness of Q or d to ose of its determinants Price Elasticity of Demand - Price of own good d - Measures how much Q responds to change in its own P o o Price-sensitivity of buyers’ demand  will consumers leave you if price increase o If easy for consumers to leave, then very sensitive o Life saving drug, dying, will pay anything for it. If pharm raises price, then demand unlikely to change as much - Example: P rises by 10%, how much is Q goidg to change? o 15%/10% = 1.5 is the price elasticity - Calculating Percentage: Instead of worrying about start and end value, take average of the two o - Therefore doesn’t matter which value you use as “Start” and “end”. - Need to take absolute value and take which curve looking at in terms of + or -. Demand always – - Example: midpoint method o | | o | | - Clicker: P = 70, Q = 5000 d o P = 90, Q d 3000 Price elasticity of demand is 2 What determines Price Elasticity? - Relatively elasticity = changes Q d lot - Inelastic = not much change in Q d - Example: price of Rice Krispies and sunscreen both rise by 20%, so Q drods the most for Rice Krispies, because more substitutes for Rice Krispies. - Example: blue jeans vs Clothing, both goods rise by 20%, then Q of bdue jeans drop most o Narrowly defined goods - **Price Elasticity higher for narrowly defined goods than broadly defined ones - Example: Insulin vs Caribbean cruises, rise in price of 20%, then caribbean cruises drops most o Cruise is luxury, insulin is necessity - **Price elasticity higher for luxuries than for necessities - Example: gasoline in short run vs gasoline in long run o Q drops more in long run because can buy hybrid cars or live closer to where they work - **Price elasticity higher in long run than in short run - Price elasticity of demand is closely related to slope of demand curve - Rule of thumb: flatter curve = bigger elasticity, steeper the curve, inelastic Examples of Extremes - Perfectly Inelastic: D curve vertical o consumers’
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