ECON 1B03 Chapter Notes - Chapter 5: Plasma Display, Demand Curve, Broccoli
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Richard Damra Monday, January 28, 2013
Econ 1B03 – Chapter 5 – Elasticity Part 2
Generalities About Elasticities and Their Determinants
1. Goods that are necessities tend to have inelastic demand.
o E.g demand for insulin – perfectly inelastic
o E.g demand for dentist visits – inelastic
2. Goods that are luxuries tend to have elastic demand
o E.g plasma TV or vacations – elastic
3. Goods that have close substitutes tend to have elastic demand.
o E.g Coke and Pepsi (if Price of Coke increase, switch to Pepsi fairly quickly)
o E.g eggs have no close substitutes – inelastic
4. Goods tend to have more elastic demand over longer time horizons
o You can find substitutes in the long run where you can’t today
5. How you define the market makes a difference
o E.g market for food – perfectly inelastic.
o Market for vegetables – more elastic
o Market for broccoli – even more substitutes so even more elastic
o The more narrowly defined the market, the more elastic the demand.
6. How much of your budget you spend on a good determines elasticity.
o If you spend a large proportion of your budget on a good, demand for that good will
tend to be elastic.
o If you only spend a small proportion, demand will tend to be inelastic.
Elasticity is not constant along a linear demand curve
Elasticity is not the same as slope.
Slope measures rates of change.
Elasticity measures percentage changes.
We can illustrate different elasticities along the demand curve
o Midpoint = unit elastic
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