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ECON 100 - Week 2 - Elasticity and Its Applications - Ch. 3 - Dr. DeNicco

by: Jay Ko

ECON 100 - Week 2 - Elasticity and Its Applications - Ch. 3 - Dr. DeNicco ECON 100

Marketplace > Rice University > Economics > ECON 100 > ECON 100 Week 2 Elasticity and Its Applications Ch 3 Dr DeNicco
Jay Ko
Rice University
GPA 3.8

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ECON 100 - Week 2 - Elasticity and Its Applications - Ch. 3 - Dr. DeNicco
Dr. James DeNicco
Class Notes
elasticity, demand, supply, Economics, DeNicco, applications
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This 6 page Class Notes was uploaded by Jay Ko on Monday September 5, 2016. The Class Notes belongs to ECON 100 at Rice University taught by Dr. James DeNicco in Fall 2016. Since its upload, it has received 3 views. For similar materials see PRINCIPLES OF ECONOMICS in Economics at Rice University.

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Date Created: 09/05/16
ECON 100 – Dr. James DeNicco – Week 2 Ch. 3 – Elasticity and Its Application • Elasticity o Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants. o Price Elasticity of Demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. • Determinant Demand of Elasticity o Ability` of Close Substitutes: goods with close substutes tend to be more elastic. § Ex. If the price of butter goes up, someone will buy more margarine instead. § Lots of substitutes can change behavior easily and buy the other product. o Necessities versus Luxuries: necessities tend to be less elastic than luxury items. § Ex. I need to take my kids to the doctor even if its more expensive, but the expensive boat can wait and is not needed. o Definition of the Market: broader markets tend to be less elastic. § Ex. The food market can be less elastic than the ice-cream market. § Ex. Broccoli is a narrow market and if the price of broccoli goes up, one can substitute with asparagus. • A broad market = vegetables • The broader the market, the less elastic it is since vegetables are a necessity. o Time Horizons: goods tend to have more elastic demand over longer time horizons. § Ex. When the price of gasoline goes up, initially we don’t decrease out consumption by much because of our dependence, but over time, we can switch to more fuel efficient cars. • Computing Price Elasticity of Demand o Price elasticity of demand = ▯▯▯▯▯▯▯▯▯▯ ▯▯▯▯▯▯ ▯▯ ▯▯▯▯▯▯▯▯ ▯▯▯▯▯▯ ▯ ▯▯▯▯▯▯▯▯▯▯ ▯▯▯▯▯▯ ▯▯ ▯▯▯▯▯▯ § Ex. Price of Jack goes up by 10% and quantity demanded goes down by 20%. • Price elasticity of demand = ▯▯% = 2 ▯▯% • Better Way to Calculate Price Elasticity of Demand – Midpoint Method ECON 100 – Dr. James DeNicco – Week 2 o Ex. • • Total Revenue and Price Elasticity of Demand • ECON 100 – Dr. James DeNicco – Week 2 • Total Revenue and Price Elasticity of Demand o Total Revenue: the amount paid by buyers and received by sellers of a good computed as the price of the good times and quantity sold § Total Rev = P + Q o The impact of price change on total revenue depends on the elasticity of demand. o When demand is inelastic (a price elasticity of less than 1), price and total revenue move in the same direction. o When demand is elastic (a price elasticity greater than 1), price and total revenue e move in the opposite directions. o When demand is unit elastic (a price elasticity equals to 1), total revenue remains constant when prices change. • Elasticity and Total Revenue Along a Linear Demand Curve • Income Elasticity of Demand o Income Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a change in consumers. o IED>0: normal good o IED<0: Inferior good • The Cross-Price Elasticity of Demand o The Cross-Price Elasticity of Demand: a measure of how much the quantity demanded of a good responds to a change in the price of another good. ECON 100 – Dr. James DeNicco – Week 2 o CPED>0:substitute o CPED<0: compliment • Price Elasticity of Supply o Price Elasticity of Supply: a measure how much the quantity supplied of a good responds to a change in the price of that good. • ECON 100 – Dr. James DeNicco – Week 2 • Price Elasticity of Supply Can Vary • Applications – Farming ECON 100 – Dr. James DeNicco – Week 2 • Applications – OPEC • Applications – Drugs


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