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Objective:_____________________________________________________________________________________________________________________________________________________________________________________THE LAW OF DEMAND SAYS...Consumers will ____________________________________________________________________________HOW MUCH MORE OR LESS? DOES IT MATTER?ElasticityElasticity shows _____________________________________________________________________________4 Types of Elasticity____________________________________________________________________________________________________________________________________________________________________________________________________________1. Elasticity of DemandElasticity of Demand- Measurement of ___________________________________________________________________________What will happen if price increase? How much will it effect Quantity Demanded2. Who cares?Used by firms _____________________________________________________________Used by the government ________________________________________________Inelastic DemandInelastic DemandINelastic = Quantity is INsensitive to a change in price. If price increases, _______________________________________________________________If price decreases, _______________________________________________________________ In other words, __________________________________________________________________________An INELASTIC demand curve is steep! (looks like an “I”)20574007112000Examples:GasolineMilkDiapersChewing GumMedical CareToilet paperGeneral Characteristics of INelastic Goods:34290009842500Few SubstitutesNecessitiesSmall portion of incomeRequired now, rather than later Elasticity coefficient less than 1Elastic DemandElastic = Quantity is ____________________________________________________ If price increases, _________________________________________________________________If price decreases, _________________________________________________________________In other words, _____________________________________________________________________________An ELASTIC demand curve is flat!171450085090Real EstatePizzaGoldReal EstatePizzaGoldExamples:Soda BoatsBeef354330020955General Characteristics of Elastic Goods: Many Substitutes Luxuries Large portion of income Plenty of time to decide Elasticity coefficient greater than 11257300356870Elastic- 1.27INelastic - .20Elastic- 1.60INelastic - .31INelastic - .13Elastic - 2.6 0Elastic- 1.27INelastic - .20Elastic- 1.60INelastic - .31INelastic - .13Elastic - 2.6 3086100356870What about the demand for insulin for diabetics?What if % change in quantity demanded equals % change in price?0What about the demand for insulin for diabetics?What if % change in quantity demanded equals % change in price?Elastic or Inelastic?20574001435735Unit Elastic (Coefficient =1)45 Degrees0Unit Elastic (Coefficient =1)45 Degrees6858001485265Perfectly INELASTIC(Coefficient = 0)0Perfectly INELASTIC(Coefficient = 0)-114300-635Beef- Gasoline- Real Estate- Medical Care- Electricity- Gold-Beef- Gasoline- Real Estate- Medical Care- Electricity- Gold-30861001371600 Total Revenue TestUses elasticity to show how changes in price will affect total revenue (TR). (TR = ______________________________________) Elastic Demand- _______________________________________________________________________________________________________________________________________________________Inelastic Demand- _______________________________________________________________________________________________________________________________________________________Unit Elastic-____________________________________________________________________________Ex: If demand for milk is INelastic, what will happen to expenditures on milk if price increases?Price Elasticity of SupplyElasticity of Supply- Elasticity of supply shows ___________________________________________________________________________________Elasticity of supply is based _________________________________________________________Producers need time to produce more.INelastic = _________________________________________________________________________________Most goods have INelastic supply in the short-run Elastic = ____________________________________________________________________________________Most goods have elastic supply in the long-runPerfectly Inelastic = ______________________________________________________________________Set quantity suppliedCross-Price Elasticity of DemandCross-Price elasticity shows ______________________________________________________ _________________________________________________________________________________________________It shows if two goods are _________________________________________________________% change in quantity of product “b”% change in price of product “a”If coefficient is negative (shows inverse relationship) then the goods are ____________________If coefficient is positive (shows direct relationship) then the goods are ______________________Income-Elasticity of DemandIncome elasticity shows _________________________________________________________________________________________It shows if goods are ______________________________________________% change in quantity% change in incomeIncome increases 20%, and quantity decreases 15% then the good is an…If coefficient is negative (shows inverse relationship) then the good is _______________________If coefficient is positive (shows direct relationship) then the good is _______________________Ex: If income falls 10% and quantity falls 20%…1996 Micro FRQ #2The Toledo arena holds a maximum of 40,000 people. Each year the circus performs in front of a sold out crowd. (a) Analyze the effect on each of the following of the addition of a fantastic new death-defying trapeze act that increases the demand for tickets.(i)The price of tickets(ii)The quantity of tickets sold(b) The city of Toledo institutes an effective price ceiling on tickets. Explain where the price ceiling would be set. Explain the impact of the ceiling on each of the following.(i) The quantity of tickets demanded(ii) The quantity of tickets supplied(c) Will everyone who attends the circus pay the ceiling price set by the city of Toledo. Why or why not? ................
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