MICROECONOMICS CH 5 OWN PRICE ELASTICITY
MICROECONOMICS CH 5 OWN PRICE ELASTICITY ECON 211
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This 3 page Class Notes was uploaded by Addie Pearson on Monday February 29, 2016. The Class Notes belongs to ECON 211 at Clemson University taught by prof fiore in Winter 2016. Since its upload, it has received 28 views. For similar materials see Micro Economics in Economcs at Clemson University.
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Date Created: 02/29/16
CH 5 OWN-PRICE ELASTICITY OWN PRICE ELASTICUTY - PRICE ELASTICITY- a measure of responsiveness of quantity to changes in price - Why do we care? o How many customers would our firm lose if we raised the price? o How many would we gain bc of sale? o How much do cigarette taxes reduce smoking? o How much does income taxes discourage work? o How will weed consumption be affected by laws allowing medical use of weed? MEASURING ELASTICITY - Elasticity of demand o % change in Quantity demanded for a given % or change in price - Elasticity of supply o % change in Quantity supplied for given % change in price - Each measures how quickly quantity changes as one mores up or down the curve on the graph (demand or supply) ELASTICITY OF DEMAND - The law of demand says “prices go up -> quantity down, vice versa” o But by how much does the quantity demanded fall or rise? o Ex: two different demand curves for the same market Same price increase, one demand curve less responsive (less steep), one more responsive (steep) - Elastic demand- relatively large quantity change when price changes o If demand is elastic, even a small price increase will be enough to inspire many buyers to stop buying - Inelastic demand- relatively small quantity change when price changes o If demand is inelastic, many buyers will go on buying even in the face of a large price increase What determines elasticity of demand? - In other words, what determines how much less of a product you will consume when its price rises? o Substitutes o The closer the subs, the smaller the price increase needed to inspire consumers to switch o Closer subs more elastic demand o Though not all subs are equally good… o Ex: subs for Clemson football in death valley Away game Clemson baseball, soccer Atlanta falcons game o Ex: which one of these markets will have the most elastic demand? Kellogg’s cereal from ingles in Clemson University MOST ELASTIC Kellogg’s cereal in Clemson University Cereal in Clemson University LEAST ELASTIC Elasticity of demand and time - Demand is always more elastic in the long run than in the short run o Ex: suppose the price of gas rises and you drive to campus. What can you do to reduce consumption in… The short run- walk, bus, carpool Over a longer period?- buy a bike Even longer?- move closer, buy a more fuel efficient car o The longer the period, the greater the number of actions a consumer can take (ex: certain actions become less costly as time passes) o In other words, the longer the period of time, the greater the number of possible subs (notice these are all subs for using gas) Measuring the elasticity of demand - A common unit is required to compare the elasticities of different goods, so elasticity is measure in percentage changes - Elasticity of demand = ED= (% change in Qd)/(% change in P) - Not the elasticity of demand will be negative - Why? Law of demand = negative relationship between price and Qd - Nonetheless, elasticity of demand is often referred by its absolute values Evaluating the elasticity of demand - Consider the measure: (% change in Qd)/(% change in P) o The numerator tells us by what percent Qd changes o Denominator tells us by what percent P changes - If demand is very responsive to a price, would we expect the percent change in P or the perent change in Qd to be bigger? o % change in Qd > Elastic and inelastic demand - Demand is elastic if Ed > 1 (ie numerator >denominator) o %change in Qd > % change in P o Consumers are “price sensitive” - Demand is inelastic if Ed< 1 (ie numerator < denominator) o %change in Qd < % change in P o Consumers are NOT price sensitive - Demand is unit elastic if Ed = 1 o Equal change Real life elasticities - Economists have estimated the elasticities of demand for various products: o Salt 0.1 o Gas (short term)0.2 o Gas (long term)0.7 o Movies 0.9 o Private education1.1 o Toyota cars 4.0 Perfectly inelastic demand - If demand is perfectly inelastic, Ed=0 o His would imply that even the largest change in price would not reduce quantity demanded at all o The demand cure is a straight vertical line o Implies there are no substitutes o NO PRODUCTS ARE PERFECTLY INELASTIC Perfectly elastic demand - If demand is perfectly elastic, Ed=infinity o This would imply that even the smallest change in price would reduce quantity demanded to zero o Demand curve is a straight horizontal line o Implies perfect subsitiute Perfectly elastic and perfectly inelastic demand (cont.) - There is a tendancey to treat demand as if it is either perfectly inelastic/elastic o “Water is a necessity of life. People won’t cut down on water consumption no matter what” o “People need to drive to get to school/work. Divers can’t and won’t cut back just because gas prices rise” o “People won’t use more medical treatment just bc insurance covers it” o “If we raise our prices even a little, we will lose all our customers!” - Usually what is meant is that “demand is inelastic” or “demand is elastic. - But demand is NEVER perfectly inelastic, and not usually perfectly elastic. - And demand is ALWAYS MORE ELASTIC IN THE LONG RUN!!
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