Economics- Chapter 20: Elasticity

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Elasticity
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-the range of if you raise prices and if you get profit or lose profit in the process -a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus.
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Elasticity of Demand
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-e*subscript d= (% change in Quantity demanded)/(% change in Price) -you want the % change in Quantity to be small because you want to lose less customers -if ed is greater than 1 then you should NOT change prices -if ed is less then 1 then it’s worth it -measures how many consumers respond to a price change
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Unit Elastic
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– equal/equal=1
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Marginal Decision
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-what happens if you go up 1 more
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On the Margin
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-right where you’ll maximize profits
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Perfectly Elastic
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-any little change in price people aren’t going to buy it -ex. wheat -people just go to substitute goods if price rises
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Perfectly Inelastic
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-no matter what the price, people will buy it -ex. gas, electricity
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Elasticity of Supply
Elasticity of Supply
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-as prices go up, you’ll make more but eventually it won’t be worth it -ex. price increases, David making more T shirts, elastic because he responding to price change
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Cross Price Elasticity
Cross Price Elasticity
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-substitution affect -increase sales of competitor(s) -as price increases, demand for substitute increases
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What are consumers?
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-rationally self-interested -more elastic -end up paying all the taxes because suppliers can’t pay them when price is already so low
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Inelastic
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-consumers will buy a product no matter what the price -consumers unresponsive to change -ex. medicine
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Revenue
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-(price)(demand)=revenue
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David’s operating in the INELASTIC area of his curve. Should he raise prices?
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-yes, because inelastic means that no matter what the price, the quantity demand will not change, or change a negligible amount
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David’s operating in the ELASTIC area of his curve. Should he raise prices?
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-no, because elastic means that people will respond to the increase price by buying less of the product, which will affect revenue
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Which part of a demand graph is more elastic?
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-the bottom
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Substitute Goods
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-key to elastic demand -if something becomes too expensive, consumers can just buy another product -cause the demand curve to flatten -ex. A and B and substitutes. A’s price increases, B’s quantity demanded increases as a result so POSITIVE relationship
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How is time a factor in all of this?
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-if you give people a lot of time to adjust to a change, then they have more time to change their buying habits -time makes things MORE ELASTIC
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Price Discrimination
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-people not willing to change their buying habits -ex. old people much more inelastic (buy certain products no matter what the price)
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To change buying habits…
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-coupons, discounts -i.e. incentives
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Determinants of Elasticity of Demand
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-time, substitutes, % of consumers budget -ie. the more expensive something is, the more 10% for example will add onto the over all price
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When elasticity in NOT 1
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-Raises price $5, loses 5 customers -not 1 because we don’t know the original price and quantity

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