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Unformatted text preview: ECON 200 B Spring 2010 Clower ELASTICITY I. PRICE ELASTICITY OF DEMAND A. ELASTICITY measures the responsive of quantity demanded or quantity supplied to changes in one of its determinants. 1. If something is MORE elastic it is more responsive to a change in the determinant. 2. If something is LESS elastic it is less responsive to a change in the determinant. B. Price elasticity of demand: Measures the responsiveness of quantity demanded to changes it that goods price. C. Determinants of price elasticity of demand 1. Number of available substitutes i. The more substitutes available the MORE price elastic the good is. ii. The fewer substitutes available the LESS price elastic the good is. 2. Luxury versus necessity i. Luxury goods (like champagne or filet mignon) tend to be relatively more price elastic than necessities (like medication or milk). 3. Definition of the market i. The broader the market the LESS price elastic. For example, blue jeans are less price elastic than Diesel blue jeans. 4. Time Horizon i. The longer the time horizon, the MORE price elastic demand is. D. Computing price elasticity of demand 1. From the definition: ??? ???? ? ??? = ????? ??? ??? ????? ????? ??? ?? 2. Midpoint method: i. The midpoint between any two points in the average price and average quantity between those two points. ii. We use this method because it is a consistent method. It produces outcomes that are the same regardless of what direction we think of moving....
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This note was uploaded on 11/19/2010 for the course ECON ECON200 taught by Professor Ericka during the Spring '10 term at University of Washington.
- Spring '10
- Price Elasticity