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Lecture 6

# ECON 1 Lecture 6: Day 6: Elasticity and its Applications (cont..) Premium

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Department
Economics
Course
ECON 1
Professor
Ali, Omer
Semester
Spring

Description
Day 6: Elasticity and its Applications (continued from last class on Day 5) EXAMPLE FOR PRICE ELASTICITY OF DEMAND Use the following information to calculate the price elasticity of demand for iPhones: ● if P = \$400, quantity demanded = 10,600 ● if P = \$600, quantity demanded = 8,400 Use the midpoint method to calculate percentage changes \$600 − \$400 % change in P = \$500 × 100% = 40% 10,600− 8,400 % change in quantity demanded = 9,500 × 100% = 23.16% % 𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐23.16% price elasticity of demand = % 𝑐𝑐𝑐𝑐𝑐𝑐 𝑐𝑐 𝑐 = 40% = 0.58 PRICE ELASTICITY OF DEMAND ● determinants of price elasticity of demand: ○ availability of close substitutes (when higher → higher price elasticity) ○ narrowly defined goods (higher price elasticity than for broadly defined ones) ■ blue jeans (narrowly defined) → have more substitutes, like black jeans ■ clothing (broadly defined), however, does not ○ luxuries (higher price elasticity than for necessities) ■ insulin (necessary to diabetics) → change in price would cause little to no decrease in demand ■ yacht = luxury → if price rises, some people will forego it ○ long-run (higher price elasticity than in the short-run) ■ if gasoline prices increase greatly → not much people can do in the short-run (other than ride the bus / carpool) ■ long-run → people can buy smaller cars or live closer to work ● variety of demand curves ○ price elasticity of demand > 1 → demand is elastic ■ demand curve: relatively flat ■ consumers’ price sensitivity: relatively high ○ price elasticity of demand < 1 → demand is inelastic ■ demand curve: relatively steep ■ consumers’ price sensitivity: relatively low ○ price elasticity of demand = 1 → demand has unit elasticity ■ demand curve: intermediate slope ■ consumers’ price sensitivity: intermediate ○ price elasticity
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