Posted Lecture 7 - Elasticity.pdf - Announcements u2022 HW...

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Announcements HW 2 due Sept 15, Sunday 11:59 pm Arizona time First Recitations Friday (Supply and Demand) See Office Hours in Canvas for more info on recitations 1
Order of business 1. Introduce Elasticity 2. Calculate Elasticity 2
Elasticity So far: we discussed only the direction of effects. For example: (1) own price , then Q D (2) income for a normal good, then Q D at each price level This class: beyond the direction, we are interested in the magnitude . Sure, Q D when own price But by how much? Sure, Q D when income if the good is normal… But by how much? 3
Elasticity Responsiveness of demand and supply to changes . We will focus mainly on demand in lecture, in homework, you will use the same ideas for supply . What kinds of changes ? Two different ones we will look at: 1) Price How much does a change in price affect quantity demanded? This is called the Price Elasticity of Demand 2) Income How much does a change in income affect quantity demanded? This is called Income Elasticity of Demand 4
Intuition Maybe this will help with intuition… Think about a rubber band. Suppose we think of the force as my strength, and we want to measure how it causes the rubber band to change in its shape . How the rubber band changes will depend on how elastic it is. Now think of the my force as price , and the shape as quantity demanded . So this is just like asking: How responsive is quantity demanded to changes in price ? To answer this question, we need to make sure nothing else is changing quantity demanded aside from price 5

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