Concept of Elasticity

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The Concept of Elasticity

Themes of Today's Lecture
What is an Elasticity?
Why Economists Use Elasticity
Definitions of Elasticity
How to Compute the Elasticity of Demand and Supply
Examples of Elasticity of Demand and Supply
What is an Elasticity?

Measurement of the percentage change in one variable that results from a 1% change in another variable. When the price rises by 1%, quantity demanded might fall by 5%. The price elasticity of demand is -5 in this example.

Different Types of Elasticities
Price elasticity of demand: how sensitive is the quantity demanded to a change in the price of the good. Price elasticity of supply: how sensitive is the quantity supplied to a change in the price of the good.

Examples of Demand Elasticities
When the price of gasoline rises by 1% the quantity demanded falls by 0.2%, so gasoline demand is not very price sensitive. Price elasticity of demand is -0.2 .
When the price of gold jewelry rises by 1% the quantity demanded falls by 2.6%, so jewelry demand is very price sensitive. Price elasticity of demand is -2.6
.
Examples of Supply Elasticities
When the price of DaVinci paintings increases by 1% the quantity supplied doesn't change at all, so the quantity supplied of DaVinci paintings is completely insensitive to the price. Price elasticity of supply is 0.

When the price of beef increases by 1% the quantity supplied increases by 5%, so beef supply is very price sensitive. Price elasticity of supply is 5.

Why Economists Use Elasticity
Economists want to compare apples and oranges all the time. Is oil market demand more price sensitive than wheat demand? (no) Is the labor supply of women more wage sensitive than the labor supply of men? (yes)

An elasticity is a unit-free measure.
By comparing markets using elasticities it does not matter how we measure the price or the quantity in the two markets. Elasticities allow economists to quantify the differences among markets...
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