2/4 - 3 The breadth of the market one brand vs all brands...

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2/4/08 Elasticity “Compare” means that the question is about elasticities in some way. It also means we need two panels So far, the only possible difference across the two panels is elasticity of demand. The question becomes, what about the wording tells us which panel is the one with the elastic demand curve, and which is the one with the inelastic demand curve? General rule: The easier it is for someone to walk away from something, the more elastic the demand. Increase in price= decrease in revenue-definition of elasticity 3 ways of variation of Elasticity 1. Availability of close substitutes - it is easier to walk away from something with a substitute next to it. Introducing or doing away with some alternative to this good. 2. Time horizon to the transaction - Shorter time frame is harder to walk away from
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Unformatted text preview: 3. The breadth of the market- one brand vs. all brands Suppose there are 2 hotels in Cedar Key: the “Fisher’s Delight” and the “Happy Clam.” Suppose the cleaning staff at the happy clam is planning to go on strike while a cateogory 5 hurricane is about to destroy the fisher’s delight. Compare the effects of the strike if it happens before the hurricane vs. after the fisher’s delight falls over. Answer: First we see the word compare so we draw 2 panels. Then we label the graphs. We know the first graph is elastic b/c there is a close substitute, the other hotel. After Fisher’s delight falls, there is only one hotel left making it inelastic. Since there is a strike, supply shift to the left. Then we can label our graph....
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