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Unformatted text preview: Elasticity Elasticity measures ◆ What are they? – Responsiveness measures ◆ Why introduce them? – Demand and supply responsiveness clearly matters for lots of market analyses. ◆ Why not just look at slope? – Want to compare across markets: inter market – Want to compare within markets: intra market – slope can be misleading – want a unit free measure Why Economists Use Elasticity ◆ An elasticity is a unitfree measure. ◆ By comparing markets using elasticities it does not matter how we measure the price or the quantity in the two markets. ◆ Elasticities allow economists to quantify the differences among markets without standardizing the units of measurement. What is an Elasticity? ◆ Measurement of the percentage change in one variable that results from a 1% change in another variable. ◆ Can come up with many elasticities. ◆ We will introduce four. – three from the demand function – one from the supply function 2 VIP Elasticities ◆ Price elasticity of demand : how sensitive is the quantity demanded to a change in the price of the good. ◆ Price elasticity of supply : how sensitive is the quantity supplied to a change in the price of the good. ◆ Often referred to as “own” price elasticities. Examples of Own Price Demand Elasticities ◆ When the price of gasoline rises by 1% the quantity demanded falls by 0.2%, so gasoline demand is not very price sensitive. – Price elasticity of demand is 0.2 . ◆ When the price of gold jewelry rises by 1% the quantity demanded falls by 2.6%, so jewelry demand is very price sensitive. – Price elasticity of demand is 2.6 . Examples of Own Price Supply Elasticities ◆ When the price of DaVinci paintings increases by 1% the quantity supplied doesn’t change at all, so the quantity supplied of DaVinci paintings is completely insensitive to the price. – Price elasticity of supply is . ◆ When the price of beef increases by 1% the quantity supplied increases by 5%, so beef supply is very price sensitive. – Price elasticity of supply is 5 . Examples of Unitfree Comparisons ◆ Gasoline and jewelry – It doesn’t matter that gas is sold by the gallon for about $1.09 and gold is sold by the ounce for about $290. – We compare the demand elasticities of 0.2 (gas) and 2.6 (gold jewelry). – Gold jewelry demand is more price sensitive. Examples of Unitfree Comparisons ◆ Paintings and meat – It doesn’t matter that classical paintings are sold by the canvas for millions of dollars each while beef is sold by the pound for about $1.50. – We compare the supply elasticities of (classical paintings) and 5 (beef). – Beef supply is more price sensitive. 10 Inelastic Economic Relations ◆ When an elasticity is small (between 0 and 1 in absolute value), we call the relation that it describes inelastic ....
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 Fall '07
 WISSINK
 Microeconomics, Supply And Demand, price elasticities

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