Class #29 11/9/11

Elasticity is (% change in quantitative demand)/ (% change in what ever your interested in)

A chart for this is

If elasticity =	Demand is said to be	In other words
< 1 (n>-1)	Inelastic	People are not very sensitive to price change
=1 (n=-1)	Unit elastic
>1 (n<-1)	Elastic	People are very sensitive to a change in price

When things get expensive, we do less of it

The things that impact elasticity are

1.   Time- when prices change, it influences our behavior on long time periods. In the short run, there aren’t a lot of options to change our behaviors. In the long run, we can plan for a while. There is a bigger change in behavior. There is more elastic demand in the long run.

2.   Budgets- When a good makes up a small portion of the budget, Price change doesn’t affect you as much as if it’s a good that you use a lot. Bigger response to the good that you use a lot.

3.   Substitutes- Availability of substitutes determines whether you can change your behaviors. Availability of substitutes is what matters.

Inelasticity increases as you move down the demand curve.

Consumers of cheap things have inelastic demand.

The law of demand is that over the entire range of prices, you might possibly pay for a good. When it surpasses this range you change how much you buy. Over a wide range of prices we’re insensitive.

Always think of parties affected. Pretzel makers are more affected by a small change in salt price than Rizzo. The overall demand curve will slope down.

Between these three things

1.   minivan –least elastic

2.   ford minivan- middle elastic

3.   red ford minivan- most elastic

The more narrowly we define a good, the more options that open up.

Total receipts= price x quantity= revenue for firm

If prices increase, Quantity sold decrease

If prices drop, Quantity sold increase

If customers are sensitive to price change, we make more by lowering prices.

If customers aren’t sensitive to price change, we make more by raising prices.

EXPENDITURES AREN’T THE SAME AS COSTS

In American healthcare, expenditures have skyrocketed, not costs.

For costs to increase, we have to say that it costs more to do that procedure than in the past.