6 elasticity[1]
TRANSCRIPT
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Elasticities
• Price Elasticity – What happens when price goes up and down to demand in a product?
• Income Elasticity – What happens when somebody’s income goes up and down to a product?
• Cross Elasticity – What happens when a substitute or complementary good goes up and down to demand in your product?
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Price Elasticity
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What couldn’t you live without?
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Price Elasticity
Price
Quantity
You will pay anything to drink….Which is why Governments control water supplies…Price inelastic!
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Price Elasticity
Price
Quantity
If the price of a cup of coffee goes up too much you will not get it… You make a cup at home. This is Price elastic.
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Price Elasticity
Price
Quantity
People are prepared to pay approximately $200 more than a standard tablet for an iPad. So the price is inelastic.
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Calculating Price Elasticity
• Price is elastic if the answer is more than 1 • Inelastic if less than 1.• Ignore any – signs in the final answer.
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Example Problem…
Yesterday, the price of envelopes was $3 a box, and Julie was willing to buy 10 boxes. Today, the price has gone up to $3.75 a box, and Julie is now willing to buy 8 boxes. Is Julie's demand for envelopes elastic or inelastic? What is Julie's elasticity of demand?
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Solution
1. % Change in Quantity = (8 - 10)/(10) = -0.20 = -20%
2. % Change in Price = (3.75 - 3.00)/(3.00) = 0.25 = 25%
3. Elasticity = (-20%)/(25%) = -0.8 = 0.8
Price inelastic
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Income Elasticity
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What Happens if my wages go up?
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Income Elasticity
Income Elasticityof Demand
% Change in Quantity Demanded
% Change in Income=
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Cross Elasticity
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Complementary Goods
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Perfect Complements
Perfect complements Must be bought E.g. Pencil and eraser
Base good and complementary good E.G. The base good is a printer and the complementary good is the cartridges
Why would you price the base good low or high?
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Substitute Goods
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Cross Elasticity
% Change in Quantity Demanded% Change in Price of one of its
substitutes or complements
Positive = substitute goodsNegative = complementary
Cross Elasticity =