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Lecture 5

ECON 20A Lecture 5: Lecture 5
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Department
Economics
Course
ECON 20A
Professor
William Branch
Semester
Winter

Description
Lecture 5 I. Price Elasticity a. Price Elasticity of Demand i. Elasticity a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants ii. Price elasticity measures how much quantity demanded responds to a change in price iii. Demands is elastic if the quantity demanded responds substantially to a price change iv. Demand is inelastic if the quantity demanded responds only slightly to a price change v. Close substitutes elastic since easier for consumer to switch to a substitute good (ice creamfrozen yogurt) vi. Necessities inelastic because they are needed to survive (electricity) vii. Luxuries elastic because they are not needed (yacht) viii. Time horizon more elastic over long horizons because necessities can become luxuries (gasoline) ix. Price elasticity of demand = x. Cases of elasticity 1. Perfectly inelastic vertical line graph (elasticity is 0) 2. Inelastic Big change in price, but change in quantity is small, downward sloping and steep (elasticity is <1) 3. Unit elasticity percent change in price is equal to the percent change in quantity, slope of 1 (elasticity is 1) 4. Perfectly elastic horizontal line at some price, if price goes up slightly, quantity demanded goes to 0, if price goes down slightly, quantity demanded goes to infinity (elasticity is infinity) 5. Elastic small change in price, but big change in quantity (elasticity is >1) xi. Hints to remember about curves 1. Steeper demand curve inelastic 2. Flatter demand curve elastic b. Other Demand Elasticity Measures i. Income elasticity of demand 1. Income elasticity of demand = ii. Crosspriced elasticity of demand 1. Crossprice 1 demand= 2 c. Supply Elasticity i. Price supply elasticity measures how much the quantity supplied responds to a change in the price ii. Price supply elasticity =
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