Overview
This lecture continues the topic of elasticity, focusing on applications, consequences of elasticity, and its importance in economics.
Applications of Elasticity
- Elasticity shows how quantity demanded or supplied responds to changes in price or other factors.
- Businesses use price elasticity to set prices and forecast changes in revenue.
- Governments consider elasticity when planning taxes, as it affects tax revenue and market outcomes.
Consequences of Elasticity
- When demand is elastic, a price increase reduces total revenue; when inelastic, a price increase raises revenue.
- Elasticities help predict the burden of taxes between buyers and sellers.
- Supply elasticity influences how easily markets respond to new opportunities or shocks.
Importance in Economics
- Elasticity measures how sensitive consumers or producers are to price or income changes.
- Understanding elasticity helps explain why some products have more volatile prices.
- Policymakers and firms rely on elasticity estimates for informed decision-making.
Key Terms & Definitions
- Elasticity — A measure of how much quantity demanded or supplied responds to changes in one of its determinants.
- Price Elasticity of Demand — The percentage change in quantity demanded divided by the percentage change in price.
- Elastic — When elasticity is greater than 1; quantity reacts strongly to price changes.
- Inelastic — When elasticity is less than 1; quantity reacts weakly to price changes.
Action Items / Next Steps
- Review your notes on elasticity concepts and formulas.
- Prepare specific examples showing how elasticity affects pricing or policy decisions.