Lecture+10

# Lecture 10 - Announcements Ch5 homework due on Monday Practice exam will be posted next week Exam material taken from notes(so if the book talks

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Announcements Ch5 homework due on Monday Practice exam will be posted next week Exam material taken from notes (so if the book talks about a topic that I didn’t mention in class, then I will not test you on it)

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THE DETERMINANTS OF DEMAND ELASTICITY Perhaps the most obvious factor affecting demand elasticity is the availability of substitutes. More substitutes means that the consumer has more options and can switch more easily if price changes. The number of substitutes depends on how you define the product you are considering. EXAMPLE: TOILET PAPER If we talk about toilet paper, the individual brands will have high elasticity (you can easily switch brands if the price of one brand rises). However the demand for all toilet paper will be less elastic. (If the price of all TP goes up, you are not going to stop buying it!). 1. AVAILABILITY OF SUBSTITUTES
THE DETERMINANTS OF DEMAND ELASTICITY When an item represents a relatively small part of our total budget, we tend to pay little attention to its price. So quantity demanded is not very responsive to price changes (i.e. demand is inelastic). EXAMPLE: SALT. First, people don’t buy salt very often. And, salt is so cheap that even if price doubled, they probably wouldn’t notice 2. THE IMPORTANCE OF BEING UNIMPORTANT

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THE DETERMINANTS OF DEMAND ELASTICITY 3. THE TIME DIMENSION The elasticity of demand in the short run may be very different from the elasticity of demand in the long run. In the longer run, demand is likely to become more elastic, or responsive, simply because households make adjustments over time and producers develop substitute goods. EXAMPLE: GASOLINE
Selected price elasticities of D (absolute values) 5 Product Short run Long run Cigarettes (among adults) Electricity (residential) Air travel Medical care and hospitalization Gasoline Milk Fish (cod) Wine Movies Natural gas (residential) Automobiles Chevrolets - 0.1 0.1 0.3 0.4 0.4 0.5 0.7 0.9 1.4 1.9 - 0.4 1.9 2.4 0.9 1.5 - - 1.2 3.7 2.1 2.2 4.0

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OTHER ELASTICITIES YOU SHOULD KNOW Remember, “elasticity” is a general term that talks about the relationship between two variables. Using elasticities, we can look at other
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## This note was uploaded on 12/06/2011 for the course ECON 2005 taught by Professor Zirkle during the Fall '07 term at Virginia Tech.

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Lecture 10 - Announcements Ch5 homework due on Monday Practice exam will be posted next week Exam material taken from notes(so if the book talks

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