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This 2 page Class Notes was uploaded by Jordan Derby on Wednesday March 2, 2016. The Class Notes belongs to 12200 at Ithaca College taught by Elizabeth Kaletski in Spring 2016. Since its upload, it has received 20 views. For similar materials see Principles of Economics: Microeconomics in Economcs at Ithaca College.
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Date Created: 03/02/16
Elasticity: Supply and Demand Elasticity- a numerical measure of the responsive Qd or Qs to one of its determinants • Measures how much one variable responds to changes to another variable • One type of elasticity measures how much demand for your websites will fall if you raise your price Price of Elasticity in Demand- measures how much Qd responds to a change in P • Price of Elasticity in Demand = Percentage change in Qd/Percentage change in P • Anything above 1.0 = Really Responsive Calculating Percentage Changes: Midpoint Method- Percentage of Change in P = new price – initial price ((new price + initial price)/2) X 100 Lessons: Price elasticity is higher when close substitutes are available • You respond (responsive) more when there are more substitutes Price elasticity is higher for narrowly defined goods than for broadly defined ones Price elasticity is higher for luxuries than for necessities Price elasticity is higher in the long run than in the short run Price elasticity is higher for goods that are a larger portion if income spent The Variety of Demand Curves • The price of elasticity of demand is closely related to the slope of the demand curve • Rule of Thumb: o The Flatter the Curve = The Bigger the Elasticity o The Curvier the Curve = The Smaller the Elasticity • “Perfectly inelastic demand” customers don’t respond (Qd is 0) o Does not truly exist • “Inelastic Demand” = >1 • “Unit Elastic” = 1 • “Elastic” = <1 • “Perfectly Elastic” = Infinity (P is 0) Price Elasticity and Total Revenue • Revenue= P x Q • As Price increases: o Higher P means more revenue on each unit you sell o But you sell fewer units (lower Q), due to Law of Demand Price Elasticity of Supply – measures how much Qs responds to a change in P • Measures sellers’ price-‐sensitivity Income Elasticity of Demand – measures the response of Qd to a change in consumer income • IED = % Change in Qd / % Change in Income Cross-‐price Elasticity of Demand – measures the response of demand for one good to changes in the price of another good • C-‐PED = % Change in Qd for Good 1 / % Change in P for Good 2 • For substitutes, cross-‐price elasticity > 0 • For complements, cross-‐price elasticity < 0
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