· M =____% change in quantity demanded_______
% change in whatever you are interested in
% change in whatever you are interested in
o Example: Own price elasticity of demand for apples:
§ Price initial: $1.50/pound
§ Quantity initial: 6 pounds of apples
§ Price final: $2.00/pound
§ Quantity final: 2 pounds of apples
· Mapples=__ [(2.00-1.50)/1.50]_ =2/3
[(2-6)/6] 1/3 =2 (incredibly elastic)
· Overall idea:
o If [M] = | o Demand is said to be | o In other words |
o <1 (m > -1) | o Inelastic | o People are not very sensitive to changes in price |
o = 1 (m =1) | o Unit elastic | o |
o >1 (m <-1) | o Elastic | o People are VERY sensitive to changes in price |
· Changes in elasticity
o Mostly long-term (hard to be short-run)
o Depends on
§ Suppliers
§ Consumer demand
· What Impacts elasticity?:
o Time
o Budget
o Substitutes
§ The more possible substitutes, the greater demand elasticity
· Elasticity in Graphs:
o X-axis: Quantity Demanded
o Y-axis: Price
o Change in Qd by Rachel is much more inelastic
o Change in Qd by Michael is much more elastic
o Conclusion:
§ More horizontal demand curves are generally elastic
§ More vertical demand curves are generally inelastic
· If asked randomly:
o Minivan
Ford Minivan
Red Ford Minivan
Would you buy the good at a different level?
§ substitutes increases as you get more specific
§ Demand for red ford minivan is most elastic
· Total receipts (revenues) : P x Q
o If price increases, quantity decreases
o If quantity increases, price decreases
o Firms must find equilibrium price to maximize both price and quantity
§ Used to calculate elasticity of a product
§ At quantity of 4: $320
§ At quantity of 10: $500
§ By lowering price, they realize that they gain money
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