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Chapter 5

Microeconomics chapter 5

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ECON 200

Microeconomics Chapter 5 Elasticity and itsApplication  Elasticity: a measure of the responsiveness of quantity demanded or supplied to a change in one of its determinants.  Measures how willing consumers are to buy less of the good as the price rises  Price elasticity of demand: measures how much the quantity demanded of a good responds to a change in the price of that good. (% change in quantity demanded / % change in price)  Elastic: quantity demanded responds substantially to changes in price. (<1 quantity moves proportionately more than the price)  Inelastic: quantity demanded responds only slightly to change in price. (>1 quantity moves proportionately less than the price )  Unit elastic: = 1. Quantity moves the same amount proportionately to the price.  Influences on elasticity  Availability of close substitutes: more elastic demand because it is easy to switch to another good like it. (butter/margarine) eggs don’t have a substitute so they are less elastic.  Necessities vs. luxuries: necessities have inelastic demand, because you need it no matter what the price is (doctor). Luxuries are elastic because you don’t need it (sailboat).  Definition of the market: narrow markets are more elastic than broad because it is easier to find substitutes. (food [broad] is inelastic because there are no subs for food) (ice cream [narrow] is elastic because you can sub any dessert for it)  Time horizon: more elastic over longer time horizons. (when gas price raises at first it is inelastic but over time people buy more fuel efficient cars)  The flatter the demand cu
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