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Elasticity
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Economic Principles
Demand sensitivity Determinants of demand Sensitivity to price changes Price elasticity of demand Cross elasticity
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Economic Principles
Substitute and complementary goods Normal and inferior goods Supply elasticity Relationship between price Elasticity of supply and tax revenues
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Demand Sensitivity
Demand Sensitivity
Demand sensitivity describes how consumer demand reacts to changes in price. High sensitivity: a given change in price will result in a large change in quantity demanded. Low sensitivity, or insensitivity: a given change in price will result in little or no change in quantity demanded.
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EXHIBIT 2
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Exhibit 3: Price Elasticities of Demand for Football Tickets and Milk In Exhibit 3, elasticity of demand for football tickets within the $4 to $3 price range is 3.5. This means:
A price elasticity of 3.5 means that a 1 percent change in price generates a 3.5 percent change in quantity demanded.
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Exhibit 3: Price Elasticities of Demand for Football Tickets and Milk In Exhibit 3, elasticity of demand for football tickets within the $4 to $3 price range is 3.5. This means:
Elasticities greater than 1.0 are price elastic.
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Exhibit 3: Price Elasticities of Demand for Football Tickets and Milk In the $2 to $1 price range, elasticity of demand for football tickets falls to 0.5. This means:
A 0.5 price elasticity means that a 1 percent change in price generates a 0.5 percent change in quantity demanded.
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In the $2 to $1 price range, elasticity of demand for football tickets falls to 0.5. This means:
Elasticities less than 1.0 are price inelastic.
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Exhibit 3: Price Elasticities of Demand for Football Tickets and Milk When the price of football tickets rises from $1 to $2, quantity demanded falls from 700 to 500. The price elasticity of demand is:
(Q2 - Q1)/[(Q2 + Q1)/2] = (700 - 500)/[(700 + 500)/2] = 1/3.
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Exhibit 3: Price Elasticities of Demand for Football Tickets and Milk When the price of football tickets rises from $1 to $2, quantity demanded falls from 700 to 500. The price elasticity of demand is:
(P2 - P1)/[(P2 + P1)/2] = (2 - 1)/[(2 + 1)/2] = 2/3
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Exhibit 3: Price Elasticities of Demand for Football Tickets and Milk When the price of football tickets rises from $1 to $2, quantity demanded falls from 700 to 500. The price elasticity of demand is:
ed = (1/3)/(2/3) = 1/2.
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EXHIBIT 4
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Cross Elasticity
Cross elasticity of demand
It is the ratio of a percentage change in quantity demand of one good to a percentage change in the price of another good.
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EXHIBIT 5
Source: Edward Mansfield, Microeconomics (New York: W. W. Norton, 1997); Robert Hall and Mark Lieberman, Economics (Cincinnati: SouthWestern College Publishing, 1998); Gary Brester and Michael Wohlgenant, Estimating Interrelated Demands for Meat Using New Measures for Ground and Table Cut Beef, American Journal of Agricultural Economics (November 1991); and Heinz Kohler, Intermediate Economics: Theory and Applications (new York: Scott, Foresman, 1986).
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Movies
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Movies
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EXHIBIT 6
Source: H. S. Houthakker and Lester Taylor, Consumer Demand in the United States, 19291970 (Cambridge, Mass.: Harvard University Press, 1970); Richard Voith, The Long-Run Elasticity of Demand for Commuter Rail Transportation, Journal of Urban Economics (November 1991); and James Griffen and Henry Steele, Energy Economics and Policy (New York: Academic Press, 1980).
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Exhibit 6: Price Elasticities of Demand in the Short Run and Long Run
Which of the following has the smallest price elasticity of demand in the long run?
Gasoline Jewelry and watches Hospital care
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Exhibit 6: Price Elasticities of Demand in the Short Run and Long Run
Which of the following has the smallest price elasticity of demand in the long run?
Gasoline
EXHIBIT 7
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When the price of Rolaids increases, some consumers are willing to switch to a cheaper substituteTums.
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EXHIBIT 8
Source: Edwin Mansfield, Microeconomics (New York: W. W. Norton, 1997); F. Gasmi, J. J. Laffont, and Q. Vuong, Econometric Analysis of Collusive Behavior in a Soft Drink Market, Journal of Economics and Management Strategy (Summer 1992); and Gary Brester and Michael Wohlgenant, Estimating Interrelated Demands for Meats Using New Measures for Ground and Table Cut Beef, American Journal of Agricultural Economics (November 1991).
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Income Elasticity
Income elasticity
It is the ratio of the percentage change in quantity demanded to the percentage change in income.
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Income Elasticity
Income elasticity
A good is considered income elastic when a 1 percent change in income generates a greater than 1 percent change in quantity demanded.
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Income Elasticity
Income elasticity
A good is considered income inelastic when a 1 percent change in income generates a less than 1 percent change in quantity demanded.
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EXHIBIT 11
Source: Edwin Mansfield, Microeconomics (New York: W. W. Norton, 1997); and F. Chalemaker, Rational Addictive Behavior and Cigarette Smoking, Journal of Political Economy (August 1991).
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Source: Ching-Fun and James Peale Jr., Income and Price Elasticities, in Advances in Econometrics Supplement, ed. Henri Thell (Greenwich, Conn.: JAI Press, 1989); and Y. Wu, E. Li, and S. N. Samuel, Food Consumption in Urban China: An Empirical Analysis, Applied Economics (June 1995).
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Exhibit 12: Comparison of Income Elasticities of Demand for Food, by Country The type of countries which tend to have the lowest income elasticity for food are:
Industrialized countries
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Quantity will not decline very much when the tax raises the price of the product.
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