Elasticity Notes (9/15/2011)

ElasticityFall 2011AP Macroeconomics Elasticity Defined a measure of responsiveness of a dependent variable to an independent variable. Three kinds: Elastic Demand Inelastic Demand Unit Elastic Demand Elasticity Demand Elasticity Demand Elasticity Demand Elasticity Expenditures Payment of cash or cash-equivalent for goods or services Total Expenditures is a measure of the money customers are willing to spend on a product at a particular price. Multiply the number demanded by the price to get total expenditures. Total Expenditures Test:Price * Quantity= Total Expenditures Determinates ofDemand Elasticity Can the purchase be delayed? Are adequate substitutes available? Does the purchase require a large portion of income? YES = ELASTIC NO = INELASTIC Best 2/3 Examples of Demand Elasticity Supply Elasticity a measure of the way in which the quantity supplied responds to a change in price. Three Kinds Elastic Supply Inelastic Supply Unit Elastic Supply Determinates of Supply Elasticity 3 ?s to Remember- Elasticity 1) Can the purchase be delayed? 2) Are adequate substitutions available? 3) Does the purchase require a large portion of income? Predicting the Market using supply, demand, and elasticity. Effect of Elasticity on Oil Prices: In the short-run… Supply and demand are inelastic. Neither can respond quickly to a change in price. Prices are volatile. In the long run… Supply and demand are elastic. Both can respond slowly to a change in price. Prices are stable. Inelastic Demand for illegal drugs If you reduce the supply of illegal drugs in the US… Prices will increase, but the quantity sold will not be altered significantly. If you reduce the demand for illegal drugs in the US… You more effectively reduce the quantity of drugs sold.