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Ch. 3—Elasticities
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Elasticity How much does quantity demanded change when price changes?
Synonyms: Responsiveness, Sensitivity
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Examples of Elasticity Numbers
Salt = 0.1 Coffee = 0.25 Cigarettes = 0.45 Restaurant meals = 2.3 Chevys = 4.0 Fresh tomatoes = 4.6
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So what do these numbers mean?
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Range of values for elasticity
When between 0 and 1 = inelastic If you change the price, the quantity demanded does not change a lot
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Range of values for elasticity
When greater than 1 = elastic If you change the price, quantity demanded changes a lot
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Range of values for elasticity
When equal to 1, there is unit elastic demand
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Range of values for elasticity
When equal to 0 = perfectly inelastic Price changes do not affect quantity demanded
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Range of values for elasticity
When equal to infinity = perfectly elastic
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What affects elasticity?
Number and closeness of competing goods The easier it is to find a substitute for something, the more elastic
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What affects elasticity?
Definition of good Narrowly defined goods are more elastic
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What affects elasticity?
Necessities v. Luxuries Things that are not necessary (luxuries) are more elastic because you can live without them if price goes up Necessities are necessary, so you’ll still want them if price goes up
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What affects elasticity?
Length of Time Everything is more elastic over time, because people can change behavior over time
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Practice Makes Perfect!
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