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Ch. 5 Elasticity and Its Application,[object Object],By Sophia TC and Kristin Soreide,[object Object]
Elasticity,[object Object],Elasticity measures  how buyers and sellers respond to changes in market conditions,[object Object],If a good is inelastic, the quantity demanded responds only slightly to a change in price,[object Object],If a good is elastic, the quantity demanded responds substantially to a change in price,[object Object]
Perfectly inelastic demand-Quantity demanded is the same regardless of price,[object Object],Perfectly inelastic supply- Quantity supplied is the same regardless of price,[object Object],Perfectly elastic demand- Very small changes in price lead to very large changes in quantity demanded,[object Object],Perfectly elastic supply- Very small changes in price lead to very large changes in quantity supplied,[object Object]
Price Elasticity of Demand,[object Object],Measures how much the quantity demanded of a good responds to a change in the price of that good,[object Object],%change in QD/ % change in P,[object Object],Shows how willing consumers are to move away from a good as its price rises,[object Object]
What determines PEOD?,[object Object],Availability of close substitutes,[object Object],Necessities vs. Luxuries,[object Object], Definition of the Market,[object Object],Time Horizon,[object Object],More substitutes have higher elasticity of its demand,[object Object],Narrow vs. Broad markets,[object Object],Long vs. Short period of time,[object Object]
Continue of PEOD…,[object Object],EX. Eggs have no close substitute where as butter has many substitutes(margarine..etc); therefore the demand for eggs is less elastic than demand for butter,[object Object],Necessities are more inelastic than luxuries which are more elastic because people can go without having luxuries for a certain period of time, but it is hard to go by without necessities,[object Object],Narrowly defined markets(bean burritos) have more elastic demand than broadly defined markets(food),[object Object],Goods have more elastic demand over longer time horizons,[object Object],EX. When price of gas rises, the QD falls only slightly in the first few months but over time people find different ways of transportation  and QD falls substantially,[object Object]
Mid Point Method,[object Object],The Mid Point method is used to calculate the price elasticity of demand and prevents from making small mistakes between two points,[object Object],Gives the same answer regardless of the direction change,[object Object], Elasticity >1- elastic,[object Object],Elasticity<1- inelastic,[object Object],Elasticity=1- unit elasticity,[object Object],Ex.,[object Object],(Q2-Q1)/[(Q2+Q1)/2],[object Object],(P2-P1)/[(P2+P1)/2],[object Object]
Total Revenue,[object Object],Information,[object Object],The amount paid by buyers and received by sellers,[object Object],Computed as PRICE of the good x QUANTITY of the good,[object Object],Changes in total revenue depend on elasticity of demand,[object Object],GRAPH,[object Object]
Income Elasticity Of Demand,[object Object],A measure of how much the quantity demanded of a good responds to a change in consumer income,[object Object],% change in quantity demanded,[object Object],% change in income,[object Object],Normal goods: positive elasticity ,[object Object],Most goods (higher income raises quantity demanded),[object Object],Inferior goods: negative elasticity ,[object Object],Ex. Bus rides ( higher income lowers the quantity demanded),[object Object]
Cross Price Elasticity of Demand,[object Object],A measure of how much the quantity demanded of one good responds to a change in the price of another good,[object Object],% change in quantity demanded (1st good),[object Object],% change in price (2nd good),[object Object],Substitutes and complements  affect whether the cross price elasticity is a positive or negative number,[object Object],Substitutes= positive elasticity,[object Object],Complements= negative elasticity,[object Object]
Price Elasticity of Supply,[object Object],A measure of how much the quantity supplied of a good responds to a change in the price of that good,[object Object], % Change quantity supplied,[object Object],	% Change in price,[object Object]
For example…,[object Object],An increase in the price of milk from $2.85 to $3.15 a gallon raises the amount that dairy farmers produce 9,000 to 11,000 gallons,[object Object],(3.15-2.85)/3.00x100 = 10 percent,[object Object],(11,000-9,000)/10,000x100= 20 percent,[object Object],Price elasticity of supply= 20 percent/ 10 percent =2.0,[object Object]
Determinants of PEOS,[object Object],Flexibility of sellers,[object Object],Goods that are somewhat fixed in supply,[object Object],Time Horizons,[object Object],Beach fronts (inelastic) vs. Manufactured goods (elastic) – harder to supply more beach land,[object Object],Supply is usually more inelastic in the short run than in the long run,[object Object]

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Elasticity and its Application (By Kristin and Sophia)

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