Chapter5+JDEM





 //Elasticity is the property that explains why some good are more 'in demand' than others- why we deems some goods a 'necessities' or 'luxuries' and how we respond to the changes in prices of each of these goods. It also allows firms to predict the corresponding changes that will come when they change the prices of their goods, making it an accurate predictor of sales. This chapter will focus on answering the big questions outlined above.//

=// When is a good elastic or inelastic? //= //**When is a good __elastic__?**// Only when the quantity demanded responds greatly to price changes.

Only when the quantity demanded responds slightly to price changes.
 * When is a good __//inelastic//__?**

= //What determines the price elasticity of demand?// =

__**What determines the price elasticity of demand:**__

1. Availability of Close Substitutes- There is more elastic demand on goods that have close subs. Having close subs. makes it easier for consumers to change from one good to another.
====2. Necessities vs. Luxuries- Necessities have inelastic demands and luxuries have elastic demands. How a good is determined as a necessity or a luxury is on the consumers and what they think. If people see a good as important to their life and benefit then it’s a necessity. If people see goods as “wants” then they are luxuries.==== ====3. Definition of the Market- When the market boundaries are made it affects the elasticity of demand. If the markets are narrow, then they mostly have more elastic demand. If the markets are broad, then they mostly have less elastic demand. Close Subs. are easier to get for Narrowly defined goods.====

4. Time Horizon- There is more elastic demand for goods that last for a long period of time.
= //How do you compute the price elasticity of demand?// =

Price elasticity of demand = % change in quantity demanded ÷ % change in price

__**//Or try the Midpoint Method://**__

(Q₂- Q₁) / [(Q₂+ Q₁)/2] ÷ (P₂- P₁) / [(P₂- P₁) / 2]




=**PRICE ELASTICITY OF SUPPLY:**= ====The price elasticity of supply measures how much the quant. supplied resonds to changes in price. This elasticity depends on the time horizon thinking about this. In most markets, supply is more elastic in the long run than in the short run. It is a measure of how much the quant. supplied of a good responds to a change in the price of that good, computed as the percentage change in quant. supplied divided by the % change in price.==== ====If the elasticity is less than 1, so that quant. supplied is proportionately less than the price, supplied is supposed to be inelastic. If the elasticity is greater than 1, so that quant. supplied moves proportionately more than the price, supply is supposed to be elastic.====

= Conclusion =

Elasticity is yet another principle of economics that can determine why consumers and producers make the decisions they do- in order to maximize profit and utility, each group will have an according response to changes in prices. The extremity of this change can be determined by the elasticity of that good.



**1. In general, elasticity is** a. the friction that develops between buyers and sellers in a market. b. a measure of how much government intervention is prevalent in a market. c. a measure of how competitive a market is. d. a measure of how much buyers and sellers respond to changes in market conditions.

a. buyers are to a change in income. b. sellers are to a change in price. c. buyers are to a change in price. d. sellers are to a change in buyers’ incomes.
 * 2. The price elasticity of demand measures how responsive**

a. the quantity demanded changes slightly b. demand shifts only slightly when the price of the good changes. c. buyers respond substantially to changes in the price of the good. d. the price of the good responds only slightly to changes in demand.
 * 3. Demand is said to be inelastic if**

a. inelastic. b. elastic. c. unit elastic. d. horizontal.
 * 4. If a good is a $1, 500,000 LUXURY SUITE CRUISE SHIP, demand for the good would tend to be**

a. the supply of Sapphire Ring would tend to be price elastic. b. the demand for Sapphire Ring would tend to be price elastic. c. the demand for Sapphire Ring would tend to be price inelastic. d. the demand for Sapphire Ring would tend to be income elastic.
 * 5. There are very few, if any, good substitutes for Yoda's Sapphire Ring . Therefore,**

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Elasticity- how responsive the quantity supplied or quantity demanded is to its determinant(s) Price Elasticity of Demand- how much the quantity demanded of a good responds to the change in price.
====Price elasticity of supply- a measure of how much the quant. supplied of a good responds to a change in the price of that good, computed as the percentage change in quant. supplied divided by the % change in price.====