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Chapter 5

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CAS EC 101
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Chapter 5: elasticity and its application The elasticity of demand • The price of elasticity of demand and its determinants  The price elasticity of demand measures how much the quantity responses to a change in price  Demand for good is elastic if quantity demanded responds substantially to changes in price o Availability of close substitutes  Goods with more close substitutes more elastic b/c it is easier for customers to switch goods o Necessities v. luxuries  Necessities have inelastic demands, luxuries have elastic o Definition of the market  Elasticity of demand in any market depends on how we draw boundaries of the market  Narrowly defined markets more elastic demand b/c easier to find substitutes o Time horizon  Goods have more elastic demand over longer time • Computing the price elasticity of demand o Price elasticity = percentage change in quantity demanded/percentage change in price • The midpoint method: a better way to calculate percentage changes and elasticities o Midpoint method: find difference b/t points/(midpoint) • The variety of demand curves o Demand elastic when elasticity is greater than one o Inelastic when elasticity is less than 1 o If elasticity is 1, demand is said to have unit elasticity o F
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