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ECON 101 NOTES: Supply and Demand: Elasticity

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Alexander Gainer

SUPPLY AND DEMAND ELASTICITY - Basic idea of how much one variable responds in changes to another Ex. How much demand for your product will fall if you raise the price - How changing one variable impacts Q (quDntity demanded) or Q (quantSty supplied) Price Elasticity of demand = % change in Q D % change in Price - Price elasticity of demand = 1/ slope - Measures how much quantity demanded responds to a change in price - Measures price-sensitivity of a buyer’s demand - Always calculate elasticity as positive There are two ways to calculate the percentage change: the standard way and the midpoint method. Standard way of percentage change = end value – start value x 100% start value - Have to use the midpoint method Midpoint method of percentage change = end value – start value x 100% midpoint - The midpoint is the middle number between the end value and the start value Ex. 0 and 20, then the midpoint value is 10 PRICE ELASTICITY DEMANDS ON… - The extent to which close substitutes are available Ex. Is there a next best thing? Coke and pepsi - If the good is a necessity or a luxury Ex. Water or a new LV bag - How broadly or narrowly the good is defined Ex. Specific brands and details - Elasticity is higher in the long run than the short run Ex. Gas in the short run is inelastic in the short run because if the price rises overnight you can’t do anything, however in the long run you might want to switch to a hybrid or ride the bus to save money, therefore more elastic. 1. There are 5 types of elasticity 1. Perfectly inelastic - No matter the price, quantity demanded stays the same Ex. You can’t go without water, so no
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