Micro 2/28

Elasticity

Elasticity of Demand

  • known as “price elasticity of demand”
  • measures consumer response to a price change
  • Ed = % change in quantity demanded / % change in price
  • look to handout on site Chris Clarks dope handout
  • should be less than or equal to zero… if you get a positive, it is wrong
  • used by Kroger Plus card
  • Government uses elasticity to control amount of tobacco sales
  • refer to graph in your graph in your notes for elasticity of A & B: (Q1-Q2 / Q1+Q2) / (P1-P2 / P1+P2) = (5 / 15) / (-2 / 18) = -3
  • if price goes up by 10%, quantity demanded goes down by 30%
  • Revenue = P*Q
  • when revenue drops, that is bad
  • slope is constant, elasticity is NOT

Types of elasticity

  1. Elastic: big response (more than 1)
  2. Inelastic: small response (less than 1)
  3. Unit Elastic (directly proportional)

Inelastic demand

  • steep almost vertical slope
  • Insulin (still need it no matter the price)
  • Heroin/Meth

Elastic Demand

  • flat demand curve
  • McDonald cheeseburgers rise in price… go to BK

Determining Elasticity of Demand

  1. Substitutes: increase in the number of substitutes increases the elasticity; decrease in the # of substitutes decreases the elasticity (chicken & Camry’s are elastic; salt & electricity are inelastic)(the more specific the market, the more elastic because there are more substitutes)
  2. Time: more time, more elastic; no time, perfectly inelastic; infinite time, perfectly elastic
  3. Necessity: more necessary, less elastic; water- inelastic; food (in general)- inelastic; toothpaste- inelastic; luxury goods are elastic; yacht- elastic; fur coats- elastic
  4. Budget Share: as the share increase (and takes more budget), it becomes more elastic; gas 40% (at $3.75) of budget, salt 0.0001% (at $1) of budget, if both goods increased in price by 100%, gas would be more elastic

Examples

  • Papa Johns- elastic (other pizza places)
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