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Lecture

Econ Chapter 5

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Department
Economics
Course
EC120
Professor
Olivia Ozlem Mesta
Semester
Fall

Description
Chapter 5 –Econ September 26 , 2012 Elasticity- measures how much one variable changes in another variable Elasticity: measure of how much buyers and sellers respond to changes in market conditions Price elasticity is higher when close substitutes are available Price elasticity is higher in the long run than the short run Elasticity is high with luxuries, elasticity lower for necessities Chapter 5 Elasticity and its Application Elasticity—a measure of consumers respond to changes in variables such as their incomes, price of good, price of substitute goods, or price of compliment goods/services Inelastic(not a noticeable change) Elastic(notice the change)(a lot of substitutes) *flatter the curve- bigger the elasticity *steeper the curve- smaller the elasticity The Price Elasticity of Demand and its determinates - Law of demand states that a fall in price of goods raises quantity demanded, - Price elasticity of demand measures how much the quantity demanded responds to a change in price - Demand is said to be ELASTIC if the quantity demanded responds substantially to changes in the price - Demand is INELASTIC if the quantity demanded responds slightly to the change in price - The price elasticity for any good measures how willing consumers are to move away from the good as its price rises –the elasticity reflects the social, economic psychological effects that shape consumers tastes - Some general rules about what determines the price elasticity of demand:: o availability of close substitutes - goods with close substitutes tend to have a more elastic demand b/c its easier for consumers to switch(ex. butter to margarine) o necessities vs. luxuries - necessities tend to have an inelastic demand, whereas luxuries have elastic demands (when price of dentist rises, people will not dramatically change the number of times they visit the dentist, but if the price of a boat(luxury) rises, the demand for it will drop significantly, making it have an elastic demand o definition of the market - small, narrowly defined markets tend to have a more elastic demand than broadly defined markets b/c it’s easier to find close substitutes for narrowly defined goods (ex. food a broad category, has a fairly inelastic demand b/c not many substitutes) o time horizon - goods have more elastic demand over time (ex. price of gas rises, quantity decreases slightly at the first, people then start to buy fuel-efficient cars or alternate transit and over time the demand decreases substantially) Price of Elasticity of demand: ****^ EXAMPLE: A Variety of Demand Curves - economists classify demand curves according to their elasticity - Demand is ELASTIC when ELASTICITY IS GREATER THEN ONE (so that quantity moves more than the price) - Demand is INELASTIC when ELASTICITY IS LESS THEN ONE (so that quantity moves less than the price) - If demand is exactly one, quantity is moving the same as price, this is called UNIT ELASTICITY - b/c price elasticity of demand measures how much quantity demanded responds to changes in price, its closely related to the slope of the demand curve - *The flatter the demand curve, the greater the price elasticity of demand. The steeper the demand curve, the smaller the price elasticity of demand - 5 cases: -perfectly inelastic (vertical line) –regardless of price, quantity demanded stays the same- as elasticity rises, the demand curve gets flatter and flatter - perfectly elastic(horizontal line)- occurs as price of elasticity of demand approaches infinity and the demand curve becomes horizontal, reflec
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