Ch 5 Elasticity bb

# 4 goods tend to have more elastic demand over longer

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4. Goods tend to have more elastic demand over  longer time horizons. You can find substitutes in the long run where  you can’t in the short run.

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 5. How you define the market makes a difference. Example:       food – inelastic                     vegetables – more elastic                     broccoli – even more elastic The more narrowly defined the market, the more  elastic the demand for that good.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. 6. How much of your budget you spend on a good  determines elasticity. If you spend a large proportion of your budget  on a good, demand for that good will tend to be  elastic. If you only spend a small proportion of your  budget on a good, demand will tend to be  inelastic.

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Elasticity is not constant along a linear demand  curve. Elasticity is not the same as slope. Slope measures rates  of change. Elasticity measures percentage  changes. We can illustrate different elasticities along the  demand curve:
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Elasticity Along the Demand Curve P Q Ep = 1 at the midpoint Ep > 1 elastic Ep < 1 inelastic Ep = 0 perfectly inelastic Ep => infinity perfectly elastic

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Optional – For Calculus Lovers Technically, elasticity measures marginal  changes in Qd when price changes. This is point elasticity, and the formula for a  demand curve specified as Q = f(p) is Ep = dQ/dp * p/Q Since p and Q are different combinations at  different points on the demand curve, that’s why  elasticity changes along the demand curve. Since  dQ/dp is the slope of the demand curve,  that’s why we can “see” elasticity by the  steepness of the curve.
Copyright © 2006 Nelson, a division of Thomson Canada Ltd. Price Elasticity and Total Revenue A firm wants to maximize its profit. Other things  being equal, it will want to maximize its total  revenue. The firm would like to sell as much as it could at  the highest price it could get. But, it wouldn’t  want to charge a price so high that it loses  customers and its revenue drops. Here’s where knowing the price elasticity of  demand for its good is handy for a firm.

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Copyright © 2006 Nelson, a division of Thomson Canada Ltd.
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