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```Elasticity of Demand
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Are there goods that
the price were to rise
drastically?
Are there goods that
you would cut back on,
price rose?
Elasticity of Demand- a
measure of how
consumers react to a
change in price
Elasticity of Demand Cont’d
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The demand for the good
despite the price increase is
inelastic
Inelastic- describes the
demand that is not very
sensitive to change in price
If you buy much less of a
product after a price increase
this is elastic
Elastic describes demand
that is very sensitive to a
change in price
Calculating Elasticity
To compute elasticity of
demand:
■ Take the % change in the
demand of the good
■ Divide this number by the
% of change in the price of
the good
Note: The law of demand
implies that the result will
always be negative. This is
because an increase of
price=decrease in demand
and decrease in
price=increase the
quantity demanded
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A Better View
Price Range
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The elasticity of demand for
a good varies at every level
Price of baked potato
increases 50% from \$1.00
to \$1.50=price is still pretty
the same number)
Price baked potato increases
50% from \$10.00 to
\$15.00=many spud lover
will refuse to pay \$15 for a
baked potato
Differs even though the %
increase was the same
Values of Elasticity
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Elastic & Inelastic have
precise mathematical
definitions
Unit elastic- describes
the demand whose
elasticity is exactly
equal to 1
When elasticity of
demand is unitary, the
% of change in demand
is exactly equal to the
% change in price
Example of Unit Elastic
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Suppose the elasticity
of demand for a \$2
magazine at Bill’s
newsstand is unitary
When the price of the
magazine rises by
50% to \$3, Bill will sell
exactly half as many
copies as before
Example of Inelastic
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Ron’s demand for my baked
potatoes at \$1 is 4 potatoes
per day
If the price increases 50% to
\$1.50 the demand decreases
to 3 potatoes per day
25% percent decrease in
demand divided by the 50%
increase gives us an
elasticity demand of 0.5
Ron’s elasticity of demand is
less than one=inelastic
The price increase has a
relatively small effect on the
Example of Elastic
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Suppose Esteban raises the
price in his gypsy jewelry
from \$1 to \$1.50
Demand falls from 10
bracelets to 4 bracelets
because of price increase
Change in price=50%
Change in demand for
product=60%
Demand is elastic since the
elasticity of demand is
greater than 1
Availability of Substitutes
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If there are few
substitutes for a good,
then even when its
price rises greatly, you
Example: prescription
drugs=inelastic
Concert tickets=elastic
Relative Importance
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A second factor in
determining a good’s
elasticity is how much
spend on the good
If you spend a large
on the good and the
price goes up, you
have some tough
choices to make
Necessities Versus Luxuries
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The third factor in
determining a good’s
elasticity varies a great
deal from person to
person, but it is
nonetheless important.
Whether a person
considers a good to be a
necessity or a luxury has a
great impact on the good’s
elasticity of demand for
that person
Example: The Rock and
his gym membership
Change Over Time
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Demand is more
inelastic in the short
term
Demand is more elastic
over a long period of
time
Demand for gasoline,
inelastic in the short
term, is more elastic in
the long term
Elasticity and Revenue
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Total revenue- the
total amount of money