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Lecture 4

EC120 Lecture Notes - Lecture 4: Normal Good, Inferior GoodPremium

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Steffen Ziss

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Price Elasticity of Demand
πœ‚ = π‘ƒπ‘’π‘Ÿπ‘π‘’π‘›π‘‘π‘Žπ‘”π‘’ π‘β„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘žπ‘’π‘Žπ‘›π‘‘π‘–π‘‘π‘¦ π‘‘π‘’π‘šπ‘Žπ‘›π‘‘π‘’π‘‘
π‘ƒπ‘’π‘Ÿπ‘π‘’π‘›π‘‘π‘Žπ‘”π‘’ π‘β„Žπ‘Žπ‘›π‘”π‘’ 𝑖𝑛 π‘π‘Ÿπ‘–π‘π‘’
Use average P and QD (i.e. 𝑃 and 𝑄𝐷) so that πœ‚is the same for a price rise as for a price fall.
Ignore negative sign, treat πœ‚as a positive number
Elasticity along linear demand is not constant i.e.:
πœ‚> 1 at prices above midpoint
πœ‚= 1 at midpoint
πœ‚< 1 at prices below midpoint
Classification of Elasticities
πœ‚= 0 completely inelastic (vertical)
0 < πœ‚< 1 inelastic
πœ‚= 1 unit elastic
πœ‚ > 1 elastic
πœ‚ = infinity completely elastic (horizontal)
Determinants of Elasticity
πœ‚depends on the ability and willingness of buyers to substitute between products and is higher…
● In the long-run than in the short-run
● If goods have closer substitutes
● If good’s price is a larger part of buyers income
Elasticity and Consumer Spending
Consumer spending = 𝑃 Γ— 𝑄𝐷
If demand is elastic then
%π›₯ 𝑖𝑛 𝑄𝐷 > %π›₯ 𝑖𝑛 𝑃
Lower prices /\ spending, higher prices \/ spending
If demand is inelastic then
%π›₯ 𝑖𝑛 𝑄𝐷 < %π›₯ 𝑖𝑛 𝑃
Lower price \/ spending, higher prices /\ spending
If demand is unit elastic then
%π›₯ 𝑖𝑛 𝑄𝐷 = %π›₯ 𝑖𝑛 𝑃
Spending is unaffected by price changes
Elasticity Exercises
1. Fill in the table and the graphs
In notebook
2. Drought higher or lower revenues
In note book
3. Price of train ticket
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