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ECN 104 Lecture Notes - Demand Curve, Comparative Advantage, Opportunity Cost

Course Code
ECN 104
Tsogbadral Galaabaatar

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ECN104 – Week 3 Notes
Chapter 5
oWhat is elasticity? What kinds of issues can elastic help us understand?
oWhat is the price elasticity of demand? How is it related to the demand
curve? How is it related to revenue and expenditure?
oWhat are the income and cross-price elasticities of demand?
oBasic idea: elasticity measures how much one variable responds to
changes in another variable
One type of elasticity measures how much demand for your
websites will fail if you raise your price.
oDefinition: Elasticity is a numerical measure of the responsiveness of
Q(demand) and Q(supply) to one of its determinants
Price Elasticity of Demand
oPrice elasticity of demand measures how much of Q(demand)
responds to change in P(price)
oPrice elasticity of demand = Percentage change in Q(demand) /
Percentage change in P(price)
oLoosely speaking, it measures the price-sensitivity of buyers’ demand
oAlong a D curve, P and Q move in opposite directions, which would
make price elasticity negative
We will drop the minus sign and report all price elasticities as
positive numbers
Calculating Percentage changes

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oStandard method of computer percentage change: end value – start
value / start value * 100%
oMidpoint Method: is the number halfway between the start and end
values, the average of those values
oit doesn’t matter which value you use as the start and which as the
end, you get the same answer either way
oMidpoint Method = end value – start value / midpoint * 100%
What determines price elasticity?
oExample 1:
Breakfast Cereal versus Sunscreen
Price of both goods rise by 20%, for which good does Qd drop
the most?
Breakfast cereal has close substitutes (e.g., pancakes,
waffles, leftover pizza)
Sunscreen has no close substitutes so consumers won’t
buy less if price rises
Price elasticity is higher when close substitutes are
oExample 2
Blue Jeans vs Clothing
Price of both goods rise by 20%, for which good does Qd drop
the most?
For a narrowly defined good such as blue jeans, there are
many substitutes (e.g., khakis, shorts, speedos)
There are fewer substitutes for a broadly defined good
Price elasticity is higher for narrowly defined goods than
broadly defined ones
oExample 3
Insulin vs Caribbean Cruises

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prices of both goods rise by 20%, for which good does Qd drop
the most?
To millions of diabetics, insulin is a necessity. Rise in price
won’t affect demand so much
Cruise is a luxury. If price increases, demand will
definitely decrease
Price elasticity is higher for luxuries than for necessities
oExample 4
Gasoline in the short run vs Gasoline in the long run
Prices of both goods rise by 20%, does Qd drop more in the
short run or long run?
Theres not much people can do in the short run, other
than ride the bus and carpool
In the long run, people can buy smaller cars or live closer
to where they work
Price elasticity is higher in the long run than short run
Variety of Demand Curves
oPrice elasticity of demand is closely related to slope of the demand
oRule of thumb
Flatter the curve, the bigger the elasticity
Steeper the curve, the smaller the elasticity
oFive different classifications of Demand Curves
Perfectly inelastic demand (one extreme case)
% change in Q / % change in P = 0%/10% = 0
Demand Curve: Vertical
Consumers Price Sensitivity: None
Elasticity: 0
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