Chapter 5 Notes.

# Chapter 5 Notes. - This is used for farmers’ demands for...

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Chapter 5 Price Sensitivity of Buyers and Sellers. o Price Elasticity of Demand: Measures specifically, price sensitivity of buyers. o D1 shows us buyers who are more price sensitive. This is because D1 stretches along a farther amount on the Q line. D1is relatively elastic. o D0 is relatively inelastic. There are determinants for elasticity of demand. o The general idea is goods that have a lot of substitutes (IE: Crest toothpaste) are relatively elastic. o There are also goods that don’t have many/any substitute goods (IE: Medicine) that are relatively inelastic. Two Extremes: o 1. If demand is a vertical line, it is called perfectly inelastic. In this sense, if someone wants to buy a certain fixed quantity of a good for a period of time, it doesn’t matter what the price is because they’ll buy it. IE: Insulin, medication, etc. o 2. If a demand is a horizontal line, it is called perfectly elastic.
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Unformatted text preview: This is used for farmers’ demands for a product if they’re price-takers. They can sell a good for a fixed price. o Price Elasticity of Supply: Measures the price sensitivity of sellers. o SI is much more elastic than the other one, which is relatively inelastic. • Two Extremes: o 1. If the supply curve is perfectly horizontal, it’s elastic. o 2. If the supply curve is perfectly vertical, it’s inelastic. This is very common. The reason why this one is so important is because its common. It means that the quantity supplied is constant and independent of price. IE: Land looks like this. • Certain amount of land out there, regardless of price. o In the long run, the economy can only produce so much stuff. How much we can produce depends on our productive capabilities....
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