Chapter+5+Kathy+L





 What are elasticities and what do they tell us?



Elasticities
 What are elasticities anyways? Well, to keep it succinct, elasticity is how much the quantity demanded or supplied reacts to one of its determinants. Here is the official definition:


 * Elasticity**: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants.

Last chapter, we learned about supply and demand and their curves. Elasticities are strongly related to demand and supply in this chapter. First, we will be looking at the price elasticity of demand.


 * 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.

A demand can be either elastic or inelastic. In this case, demand is considered inelastic if the quantity demanded responds only a little bit to the change in price. At this point, you might be asking: when is it elastic then? Here is a diagram that makes everything much simpler:


 * Elasticity Song**

Elasticity Application Microecon~

As the price changes The quantity reacts Elasticity~

Bigger than one = elastic Less than one, not so E equals one is unit elastic!





//As the price changes, the quantity reacts//

When we are experimenting We take a variable and we change it to see the change in the intensity/direction of the reaction.

= = __Price Elasticity of Demand__

- - - - - - - - - - - - - - - - - - - - - = **E Percent change in price**
 * Percent change in quantity**

= the result must be negative because the quantity decreases

If the percentage change in quantity is greater than the percentage change in price, we would get a number greater than 1.

 If they equal each other, it is exactly one  If  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.
 * I E I > 1 : The reaction is elastic. Quantity changed more than the price did.
 * I E I = 1 : Unit elastic. It is proportional and the percentages of the two are identical.
 * I E I < 1 : Inelastic. Percentage of price is higher than quantity's.

Even if we go through the same two points, P1 -> P2 is different from P2 -> P1 B/C percentage wise, going from 10 % -> 15 % is different, percentage wise when doing vice versa. So, for this to NOT happen and get a same answer either way,

(1) We take whatever our dependent variable is (quantity)

(Q2 - Q1) - - - - - - - - - - - - <span style="font-family: Verdana,Geneva,sans-serif;">( (Q2 + Q1) / 2 )

(2) Do the same for the independent variable to get the same thing. (price)

(P2-P1) - - - - - - - - - - - - ( (P2+P1) / 2 )

<span style="font-family: Verdana,Geneva,sans-serif;"> This finds the average of the two points.

__Income Elasticity of Demand__
 * 2**

Percentage of change in quantity demanded - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Percentage of change in the income

<span style="font-family: Verdana,Geneva,sans-serif;"> <span style="font-family: Verdana,Geneva,sans-serif;"> If <span style="font-family: Verdana,Geneva,sans-serif;"><span style="font-family: Verdana,Geneva,sans-serif;"> We get to know the elasticity by this, and also what kind of good it is. (If it is negative, it is an inferior good) > They are negatively related (If it is positive, it is a normal good). > They are positively related In this case, the positive/negative charge is important
 * <span style="font-family: Verdana,Geneva,sans-serif;">I E I > 1 : The reaction is elastic. Quantity demanded changed more than the income did.
 * <span style="font-family: Verdana,Geneva,sans-serif;">I E I = 1 : Unit elastic. It is proportional and the percentages of the two are identical.
 * <span style="font-family: Verdana,Geneva,sans-serif;">I E I < 1 : Inelastic. Percentage of income is higher than quantity demanded's.

(1) We take whatever our dependent variable is (quantity demanded) (Qd2 - Qd1) - - - - - - - - - - - - - - - ( (Q2 + Qd1) / 2 )

(2) Do the same for the independent variable to get the same thing. (income) (I2 - I1) - - - - - - - - - - - - ( (I2+I1) / 2 ) This finds the average of the two points.

<span style="font-family: 'Arial Black',Gadget,sans-serif; font-size: 188.1%;">3 <span style="font-family: 'Courier New',Courier,monospace; font-size: 99%;"> <span style="font-family: Verdana,Geneva,sans-serif; font-size: 99%;">__Cross-price Elasticity__ Comparing the price of two goods

Percentage of change in price (good #1) <span style="font-family: Verdana,Geneva,sans-serif;">- - - - - - - - - - - - - - - - - - - - - - - - - - - - - Percentage of change in price (good #2)

THIS IS CONFUSING! When in doubt, graph it out. If the price of one good goes up and the price of the other goes up as well, and the demand decreases. This is called substitutes.

If the price of one good goes up and the other goes down (when the elasticity equation is negative) the two are complements.

<span style="font-family: Impact,Charcoal,sans-serif; font-size: 188.1%;">4 __Price Elasticity of Supply__

Percentage of change in quantity supplied - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - <span style="font-family: Verdana,Geneva,sans-serif;">Percentage of change in price

<span style="font-family: Verdana,Geneva,sans-serif;">
 * <span style="font-family: Verdana,Geneva,sans-serif;">We don't care about the charge here either. Just care about the reactiveness.

Straight demand curve > <span style="font-family: Verdana,Geneva,sans-serif;">Even with a straight line, the elasticity of a point on the same line is different. > <span style="font-family: Verdana,Geneva,sans-serif;">Why do I care about elasticity to begin with? Why do we care? > <span style="font-family: Verdana,Geneva,sans-serif;">Perfectly elastic/ perfectly inelastic. When we calculate these we'll get weird numbers. One is 0 and the other is impossible. <span style="font-family: Verdana,Geneva,sans-serif;"> price * number of things you sell = revenue P * Q sold = REVENUE
 * BE AWARE OF WHILE READING**

At points with low price and high quantity, the demand curve is inelastic. At points with a high price and low quantity, the demand curve is elastic.<span style="font-family: 'Courier New',Courier,monospace; font-size: 110%;">

<span style="font-family: Verdana,Geneva,sans-serif;"> - Water - Gold - Gasoline - Chocolate - iPod
 * Which of the following goods are likely to have an elastic demand and which would have an inelastic demand?**

Answers: (highlight below to see) ELASTIC - Gold, Chocolate, iPod

INELASTIC - Water, Gasoline

<span style="font-family: Verdana,Geneva,sans-serif;">


 * Total Revenue:** the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold.


 * Income elasticity of demand:** a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income.


 * Cross-price elasticity of demand:** a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good.


 * Price elasticity of supply:** a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price.


 * 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.