EC120 Lecture Notes - Lecture 5: Demand Curve, Breakfast Cereal, Sunscreen
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Elasticity: a numerical measure of how much one variable responds to changes in another variable. E. g. , how responsive is quantity demanded (or quantity supplied) to a change in one of its determinants. Elasticity of x and y: measure how much x responds to a change in y. Price elasticity of demand: measures how much the quantity demanded responds to a change in price. Loosely speaking, it measures the price-sensitivity of buyers" demand. The midpoint: the number halfway between the start and end values. The extent to which close substitutes are available. How broadly or narrowly the good is defined. Whether the good is a necessity or a luxury. Example 1: breakfast cereal vs. sunscreen (availability of substitutes) Assume the prices of both of these goods rise by 20% Consumers can easily switch if the price rises. Therefore, qd of breakfast cereal will decrease a lot. Breakfast cereal has a relatively high price elasticity. Consumers cannot easily switch if prices rise.