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5 Book Notes, Econ 201

5 Book Notes, Econ 201 - 5 Book Notes Econ 201 ELASTICITY...

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5 Book Notes, Econ 201 ELASTICITY AND ITS APPLICATIONS Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. Price elasticity of demand: a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price General rules about what determines the price elasticity of demand: - Availability of Close Substitutes o Ex: Eggs are less elastic than butter because margarine can be substituted from butter - Necessities v. Luxuries o Necessities are inelastic, but luxuries are elastic - Definition of the Market o Narrowly defined markets tend to find close substitutes for narrowly defined goods. (Not at ALL elastic) Food Ice Cream Vanilla Ice Cream (VERY elastic) - Time Horizon o Goods tend to have more elastic demand over longer time horizons (Gas as an example) Price Elasticity of Demand = Percentage change in quantity demanded Percentage change in price Example: 10 percent price increase causes you to drop the amount you buy by 20 percent equaling a price elasticity of 2. So in this example the elasticity is 2, reflecting that the change in the quantity demanded is proportionately twice

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5 Book Notes, Econ 201 - 5 Book Notes Econ 201 ELASTICITY...

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