MicroEconomics - Lecture 2

MicroEconomics - Lecture 2 - 1. Goals Understand what...

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1. Goals Understand what elasticity is. Price Elasticity of Demand Income Elasticity of Demand Price Elasticity of Supply Analyze supply and demand with greater precision. 2. Price Elasticity of Demand Price Elasticity is a measure of how much the quantity demanded of a good responds to a change in the price of that good. Availability of Close Substitutes Necessities versus Luxuries Definition of Market Time Horizon Demand is more elastic if: There is a larger quantity of close substitutes. The good is a luxury. The market is more narrowly defined. The longer the time period. Demand for Coke is higher than that of Windows XP, because it has a closer substitute, than XP If an item is a necessity, the elasticity is much lower because you still need the product (i.e. bread), while the elasticity of luxuries (i.e. Diamond Ring) is very high-- if the price goes really high, you won’t buy it. Market Definition---- Cola Market (Pepsi, Coke, RC, etc.) --More Elastic-- vs. Soda
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MicroEconomics - Lecture 2 - 1. Goals Understand what...

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