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econ notes 3

econ notes 3 - Inelastic market 3 percent of income spent...

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News of the Day : Worst Crisis Since ‘30s, with no end yet in sight - high appraisals on mortgages leads to people who shouldn’t be approved being approved - now people are going bankrupt because - banks cant make loans because there books don’t match up - people cant buy houses because cant get loans (it’s a vicious cycle) Price Elasticity Price x quantity = Total revenue 10 x 100 = $1000 Lower price by 10 percent, and as a result quantity sold goes up 20% 9 x 120 = 1,080 WOOT… elastic market. More revenue gained than customers lost Raise price by 10%, revenue goes down 20% 11 x 80 = $880 elastic market %change Qd/ % change P = 20%/10% = 2.0 %change Qd > %change P Elastic E >1 10 x 100 = 1000 10% down price 9 x 101 = 909 10% up price 11 x 99 = $1089 If you can produce less and make more, people are insensitive to price differences %chang Qd / % change P = 1%/10% = .1 %change Qd < %change P = Inelastic E < 1 Determinants of elasticity 1. The availability of substitutes 2. Habit/addiction - when gov’t wants more revenue tax cigarettes (habit forming).
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Unformatted text preview: Inelastic market 3. percent of income spent on good- the higher the percentage of your income devoted to the product the more sensitive you are to a change in price.- gum: raise price 20% from $1 to $1.20 Cars: raise price 20% $3000 -- $3600… wow bigger increase? Not percentage wise, but it is in terms of percent income Morton salt vs generic 30 cents lb ---- 42 cents lb 40% diff in price- habit- not a big percentage increase of income 4. Time to Adjust A Way to remember S - Substitutes H - Habit I - Income T - Time The more specific you make the market the more elastic the demand Gasoline -- Shell gas Highly inelastic (no substitutes) - slightly inelastic (substitutes) Lawsuit against tobacco companies- settlement from tobacco companies- got billions from the companies- demand for cigarettes is inelastic. - companies took that fine and passed it to the consumer- stock didn’t go down...
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econ notes 3 - Inelastic market 3 percent of income spent...

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