Ch.5+Elasticity+and+its+Application

media type="custom" key="2120399" - by Daniel & Younsuk

//Though this is not as important, bear in mind that we use the midpoint method for calculating elasticity.//

Price Elasticity of Demand
//: the measure of the responsiveness of quantity demanded to a change in price//

The price elasticity of demand shows the reaction of the consumers to a good when the price increases or decreases; the reaction is shown by the change in the quantity demanded, which would increase or decrease. There are three types of elasticities: //elastic//, //inelastic//, and //unit// //elastic//.

Slide 7 shows an elastic curve. As the price increased by 22%, the quantity demanded decreased by 40%. This showed a 1.82% elasticity, which is elastic. In Slide 8, as the price increased by 10%, the quantity decreased by only 1%. This showed a 0.1 elasticity, which is inelastic. Slide 9 shows a perfectly elastic & inelastic demand curve. When the prices rise, the perfectly elastic graph remains the same. A limited good such as territory can be perfectly elastic. When the prices rise, the perfectly inelastic graph disappears.


 * What ELSE can you buy? **

WHAT? Barrons AP Macro/Microeconomics is $100 now??? I only have $20 to buy an additional reference book. How am I going to study for my AP Econ test? Oh, I know. I'll just buy Kaplan's AP Macro/Microeconomics. It's only $15.

Here, Barrons AP book had a very elastic demand (see? it only took me few seconds to decide to buy Kaplan's). If a good has a close **substitute**, then, that good is said to have an elastic demand. If not, such as in the case of losing your school textbook (you have no choice but to buy the same textbook you had lost), the good is inelastic. (**Cross-price elasticity** of demand measures how the quantity demanded of one good changes as the price of another good changes.)

Now, let's look at **necessities** and **luxuries**. What else can you buy if prices of bread, rice, hamburger, hot dog, etc go up? Nothing much left, are there? You'll still need to buy those necessities. How about luxuries? Would you still buy diamonds if the prices rise to $1 billion? Probably not. I'd just buy a cheaper one, maybe a little cheaper than that. Looking at these two examples, you can tell right away. Necessities are inelastic, and luxuries are elastic.

The elasticity of demand also differs among the many specific categories one could define. If I define a very **narrow market**, such as bread, then, that market tends to be more elastic; there are many other products we can turn to. If I define a very **broad market**, such as food, then that market would be much more inelastic. Though the prices may rise, what else can I eat other than FOOD itself?


 * How much of your salaries are spent on //THAT// good? **

Believe me. Even though you don't notice, there are such things as normal goods and inferior goods in your life as well. When the quantity demanded of a good increases as your income raises, that good is a **normal good**. An example of a normal good is taco. More money you have, the more tacos you can buy. Conversely, when the quantity demanded of a good increases as you income decreases, that good is an **inferior good**. An example would be public transportation. The more money you have, you would ride a car of your own rather public transportation.


 * Time? **

As time passes, the good would become more elastic. A classical example is the rise in oil prices. If oil prices rise, people wouldn't stop riding cars right away. Because they can't change their habit instantly, after some period of time, the people change their behaviors. In the long run, however, people are adjusted to the new prices that many would find a solution, such as using public transportation, using hybrid cars, or walking close distances instead of driving.

On Slide 10, there is a graph of a linear demand curve. But not to make you get confused, normally what we talk about (elastic graphs, inelastic graphs) is just the relative elasticities of demand comparing one's steepness to the other's. Elastic graphs have //relatively// steeper slopes than inelastic graphs. However, here, we're talking about that even in the same line, the elasticity differs, as it goes up and down. In the upper part, it becomes elastic. The Mid part is 1, unit elastic, and the lower part becomes inelastic.

Price Elasticity of Supply
//: the measure of the sensitiveness of quantity supplied to a change in price//

[|Questions & Answers]

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 * __Key Concepts__**
 * elasticity**: the measure of how consumers react to changes in price or quantity
 * price elasticity of demand**: how much quantity demanded responds to a change in price
 * total revenue**: amount paid by buyers and received by sellers (price times quantity)
 * income elasticity of demand**: how the quantity demanded changes as consumer income changes
 * cross-price elasticity of demand**: how the quantity demanded changes as the price of another good changes
 * price elasticity of supply**: how much quantity supplied responds to a change in price