Module: Application of Supply and Demand - Elasticity

Key Concepts

• Supply and Demand Model: Helps understand the direction of market changes.
• Elasticity: Measures the sizes of those changes, specifically the responsiveness of buyers and sellers to changes in prices or income.

Understanding Elasticity

• Elasticity Meaning: Derived from the word "elastic," akin to a rubber band.
  • Stretchy Rubber Band: Represents high responsiveness.
  • Tight Rubber Band: Represents low responsiveness.
• Purpose: To quantify how much more of a good is consumed as income changes.

Importance of Percentage Terms

• Comparison Across Goods: Elasticity is measured in percentage terms to allow comparison of different goods.
  • Example: Responsiveness to a 1% price change in bananas, gasoline, and a $30,000 car vary significantly but can be compared via percentage changes.

Focus: Price Elasticity of Demand

• Definition: Examines how quantity demanded changes with a change in price.
• Law of Demand: Provides the direction of change:
  • If price increases, quantity demanded decreases.
  • If price decreases, quantity demanded increases.
• Primary Question: How much will quantity demanded change due to a price change?

Application

• Initial focus on price elasticity of demand as the primary application of elasticity in the supply and demand model.

These notes provide an overview of the concepts discussed in the lecture on the application of supply and demand with a focus on elasticity, particularly regarding price elasticity of demand.