Chapter 5.docx - Chapter 5 5A Elasticity and its application Ex Ashley uses tennis balls to play tennis As the price of those tennis balls increases we

Chapter 5.docx - Chapter 5 5A Elasticity and its...

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Chapter 5 5A – Elasticity and its application Ex) Ashley uses tennis balls to play tennis. As the price of those tennis balls increases we know that quantity demand decreases becomes of the Law of Demand but we don’t know how fas the quantity demand decreases Price elasticity – a measurement of the change in quality due to a change in price o It is a measurement of how willing you are to ditch the good if the price rises Ex) medicine - low elasticity Ex) gold plated pencils – high elasticity Aspects about price elasticity o It’s always a numerical value that goes from 0 to infinity o 0 is perfectly inelastic (no price can stop buyer) o 0<e>1 inelastic (price has a minimal affect on buying preferences) o e=1 is called unit elastic (absolute value for the price change = the absolute value of the quantity change) o e>1 is elastic (price has significant effect on preferences) o e = infinity = perfectly elastic (price change automatically changes buyer preference) there are several things that amy affect price elasticity of demand o availability of close substitutes ex) buying green tennis balls vs. buying pink tennis balls suppose green tennis balls skyrocket in price and pink tennis balls stay at same price ashley switches products -> price elasticity in green tennis balls is probably elastic (e between 1 and infinity) the closer the substitute the more elastic the given good o “needs” (relatively speaking)
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