Introduction to Microeconomics - ECO 1104 - Part 2

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19 Apr 2012
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The Market for Hybrid Cars
Example: Suppose that in the year 2010, the number of births is temporarily high. How
does this baby boom affect the price of baby-sitting services in 2015 and 2025? (Hint:
Five-year-olds need baby-sitters, whereas fifteen-year-olds can be babysitters.)
ECO1104: Introduction to Microeconomics
Note: when P rises, producers supply
a large quantity of hybrids, even
though the S curve has not shifted
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October 4 2011 - Lecture 8
Chapter 5: Elasticity and its Applications
Objectives:
• Learn the meaning of the elasticity of demand and the elasticity of supply
• Examine what determines the elasticity of demand and the elasticity of supply
• Learn how to apply the concept of elasticity
Elasticity
Definition
The price elasticity of demand is a measure of how much the quantity demanded
of a good responds to a change in the price of that good
Computing the Price Elasticity of Demand
An “annoying” problem with the preceding formula is that the elasticity varies depending
on whether it is a price increase or a price decrease.
Example:
ECO1104: Introduction to Microeconomics
Absolute Values
From A to B:
P 25%, Q 33%
Elasticity = 33/25 = 1.33
From B to A:
P 20%, Q 50%
Elasticity = 50/20 = 2.50
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The Midpoint Method: A Better Way of Computing Elasticity
This problem is solved if we use the midpoint method:
$$$
Example: the demand for websites
Elasticity of a Linear Demand Curve
ECO1104: Introduction to Microeconomics
Ep = 200%/40% = 5.0
$Ep = 67%/67% = 1.0
$$Ep = 40%/200% = 0.2
The slope of a linear demand curve
is constant but its elasticity is not
Midpoints
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