E100LectureNotes7

E100LectureNotes7 - 1/4/2008 1 Comparative Statics of...

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Unformatted text preview: 1/4/2008 1 Comparative Statics of Demand 1/4/2008 2 Elasticity Elasticity expresses the % change in consumption in response to a %change in price Convenient way to think about price sensitivity ) , , ( ) , , ( % % 2 1 1 1 1 2 1 1 1 1 1 1 1 1 , 1 1 1 1 1 1 1 1 1 1 I p p x p p I p p x x p p x p x E p x p x p p x x p x = = = = = 1/4/2008 3 Elasticity as a function Elasticity differs at different points on a demand curve. X 1 P 1 1/4/2008 4 Example 1 What is elasticity of demand for x 1 (p 1 , p 2 , I ) = I /p 1 ? A. 1 B. 0 C -1 D. It depends Intuition : price up 1% means ___________ ___ if Im spending all my income on good 1. 1 1 1 1 x p p x 1/4/2008 5 Example 2 x 1 =a-bp 1 E x1,p1 = = -bp 1 /(a-bp 1 ) X 1 small, p 1 large E x1,p1 large (in abs value) , 1 1 1 1 x p p x X 1 P 1 1/4/2008 6 Notes Elasticity rigorously defined captures responses to very small %changes in price. (Recall calculus). Captures local elasticity at given prices and income We simplified when we defined elasticity as % change in x 1 in response to an increase of 1% in p 1 . This was for intuition Also, elasticity goes both ways: It characterizes local responses to increases or decreases in p 1 ) , , ( ) , , ( 2 1 1 1 1 2 1 1 I p p x p p I p p x 1/4/2008 7 Some Definitions Own-price Elasticity: Relatively Elastic: Unit Elastic: Relatively Inelastic: Perfectly Inelastic: Cross-price Elasticity: 1 1 , p x E 1 1 1 , p x E 1 1 1 , = p x E 1 1 1 , p x E 1 1 , = p x E 1 2 2 1 , , or p x p x E E 1/4/2008 8 Question 1 The price of Honda Accords just went up. What will probably happen to demand for Toyota Camrys?...
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This note was uploaded on 04/10/2008 for the course ECON 100A taught by Professor Babcock during the Spring '07 term at UCSB.

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E100LectureNotes7 - 1/4/2008 1 Comparative Statics of...

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