EC120 Chapter Notes - Chapter 5: Midpoint Method, Demand Curve
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EC120 Full Course Notes
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Elasticity: measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. The price elasticity of demand and its determinants. Inelastic: quantity demanded responds only slightly to changes in the price: availability to close substitutes. Goods with close substitutes tend to have more elastic demand, it is easier for consumers to switch from that good to others: necessities versus luxuries. Necessities are usually inelastic, luxuries are elastic: definition of the market. Narrowly defined markets tend to have more elastic demand than broadly defi(cid:374)ed (cid:373)arkets (cid:271)e(cid:272)ause it"s easier to fi(cid:374)d (cid:272)loser su(cid:271)stitutes i(cid:374) a (cid:374)arrowly defined good: time horizon. Goods tend to have more elastic demand over longer time horizons. Price elasticity of demand = percentage change in quantity demanded/ percentage change in price. Percentage change in quantity will have the opposite sign as the percentage change in price. Larger price elasticity implies a greater responsiveness of quantity demanded to changes in price.