Class 5 – Demand/Supply and Elasticity
Supply and Demand
Change in both supply and demand
oDepends on the size of the shifts (price can change if demand/supply shifts more
than the other)
oPrice can also be ambiguous because we are unsure of how much the supply
and demand will shift
To find out what is ambiguous, see what the change of price vs. quantity demanded
of when supply increases a lot and demand decreases a lot, then vice versa
Elasticity
Measures how much one variable responds to the change in another variable
oThe numerical measure of the responsiveness to QD QS to Price or income
(% change in QD)/ (% change in price) – price elasticity of demand
even though the number will be negative, you drop the negative (we all know that it is
negative)
to find percentage change:
omidpoint formula
o(end value – start value)/midpoint x 100
Inelastic – between 0-1
Elastic – above 1
Rules – Price elasticity
oPrice elasticity is higher (above 1) when close substitutes are available
oPrice elasticity is higher (above 1) for narrowly defined goods than broadly
defined ones (clothing vs. jeans)
oPrice elasticity is higher (above 1) for luxuries than for necessities
oPrice elasticity is higher in the long run than the short run
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