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Lecture 6

# ECON 101 Lecture 6: ECON 101 - Chapter 6 Notes Premium

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School
University of British Columbia - Okanagan
Department
Economics
Course
ECON 101
Professor
Noriko Ozawa
Semester
Fall

Description
Thursday, October 20, 2016 ECON 101 Chapter 6: Elasticity, the Responsiveness of Demand and Supply Elasticity: The measure of how much one economic variable responds to changes in another economic variable. 6.1 The Price Elasticity of Demand and Its Measurement • Price Elasticity of Demand • The responsiveness of the quantity demanded (Qd) to a change in price (p) To Compute: • •Method 1: • Method 2: Mid-Point Formula 1 Thursday, October 20, 2016 6.2 The Determinants of the Price Elasticity of Demand The Key Determinants: 1. Availability of Close Substitutes 2. Passage of Time 3. Luxuries vs Necessities 4. Deﬁnition of the Market 5. Share in a Good in a Consumer’s Budget 1. Availability of Close Substitutes • is the most important determinant • if a product has more substitutes available, it will have more elastic demand • if a product has fewer substitutes available, it will have less elastic demand 2 Thursday, October 20, 2016 2. Passage of Time • it usually takes consumers more time to adjust their buying habits when prices change • the more time that passes, the more elastic the demand for a product becomes 3. Luxuries vs. Necessities • goods that are luxuries usually have more elastic demand curves than goods that are necessities • the demand curve for a luxury is more elastic than the demand curve for a necessity 4. Deﬁnition of the Market • in a narrowly deﬁned market, consumers have more substitutes available • the more narrowly we deﬁne a market, the more elastic demand will be 5. Share of a Good in a Consumer’s Budget • goods that take only a small fraction of a consumer’s budget tend to have less elastic demand than goods that take a large fraction • demand for a good will be more elastic the larger the share of the good in the average consumer’s budget 6.3 The Relationship between Price Elasticity of Demand and Total Revenue 3 Thursday, October 20, 2016 Estimating Price Elasticity of Demand • For a well-established product, economists can use historic data to statistically estimate the demand curve. • To calculate the price elasticity of
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