Intermediate Microeconomics: A Modern Approach, Seventh Edition

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1 Elasticity
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2 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
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3 Why Economists Use Elasticity An elasticity is a unit-free 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.
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4 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
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5 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.
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6 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 .
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7 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 0 . 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 .
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8 Examples of Unit-free 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.
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9 Examples of Unit-free 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 0 (classical paintings) and 5 (beef). Beef supply is more price sensitive.
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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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