11/9/11

• Elasticity
• the equation: %change in quantity demanded/% change in whatever you're interested in
• whatever you're interested in = price, temperature, etc.
• ex: quantity demanded initial = 6 lbs apples
• quantity demanded final = 2 lbs apples
• price initial= $1.50/lb
• price final= $2.00/lb
• [(2-6)/6]/[(2.00-1.50)/1.50]
• What Impacts Elasticity?
• Time
• long-run change in elasticity is greater than the short-run change
• Budget
• goods that make up a small portion has a barely existent elastic change especially compared to those goods which take up a large portion
• Substitutes
• if prices rise for one good, we switch to another
• Elasticity in Picture
• calculate elasticity on the curve using the elasticity equation
• Elasticity Rates
• < 1
• inelastic; not very sensitive to price changes
• 1
• "unit elastic"
• > 1
• elastic; people are very sensitive to price changes
• Which good would be more elastic
• Minivan           Ford Minivan           Red Ford Minivan
• Look at the 3 impact factors: Time, Substitutes, Budget
• More narrowly that you look at a product, the more substitutes you will find
• Time not mentioned therefore not a factor
• Budget is basically the same for all three because they are all minivans
• Answer: Red Ford Minivan
• Reason: More Substitutes available
• Law of Demand
• when  a trade-off becomes worse (more expensive) we do less of something
• using salt as an example 
• cheap; inferior good
• no real substitute 
• there is a price somewhere down the line where you will stop
• for salt, the price would just be much higher
• Total Receipts= P x Q TR= total receipts   P= price   Q= quantity demanded (inverse relationship)
• if P increases, Q decreases
• if P decreases, Q increases
• total receipts is same as total expenditures
• example-
• P= $50 Q= 10 TR= $500
• Then raise P = $80 which lowers Q= 4 So TR= $320
• Expenditures are not the same as costs
• P x Q skyrocketing for health care
•  cost  does NOT equal PxQ