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# 071007 - demand in soda a 4 Price elasticity of supply E =...

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Sheet1 Page 1 071007 | ------- Factors that influence elasticity of demand: 1) Number of substitutes -The larger the number of substitutes, the more elastic the demand -More time that passes after a price change, the more elastic the demand. -Demand for luxuries is more elastic than the demand for necessities -The more narrowly we define a product, the more elastic the demand 2) The fraction of income spent on the product -The larger the fraction, the more elastic the demand Elasticities 1) Price elasticity of demand: 2) Income elasticity of demand: For a normal good, the sign will be positive, for inferior it will be negative 3) Cross elasticity of demand How does a price change of one item, j, affect the demand of another item, i? Substitutes give a positive sign, complements give negative (for instance, price in tacos increase,

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Unformatted text preview: demand in soda, a 4) Price elasticity of supply E = |(%hQ)/(%hP)| Ey = (%hQ)/(%hINC) Ecross = (%hQi)/(%hPj) Es = (%hQs)/(%hP) Sheet1 Page 2 Allocative Efficiency Marginal Analysis This looks at the costs and benefits of an action, and compares the costs and benefits. If the marginal benefit of an action exc e If the marginal benefit of anal action is less than the marginal cost of the action =&amp;gt; don't do the action Explanation of Marginal Cost and Benefit: Do I want to eat a 3rd slice of pizza? Marginal benefit from the THIRD slice Marginal cost from the THIRD slice Those are compared to figure out the course of action If looking at a demand graph, and at a price of \$8 the equilibrium quantity of pizza is 1 million, then that is the price at which th e...
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