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THEMES // SUPPLY INELASTICITY // INTRO, HOW PRICES ARE SET |
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Intro: A Little "Econ 101"
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Elasticity
- Technical jargon:
Elasticity is the ratio of the proportional change in one variable with respect to a proportional change in another variable.
Price elasticity, therefore, measures the rate of response of quantity demanded due to a price change.
- Real World:
If someone jacks up the price of something, do we still want as much of it?
Conversely, if it goes on sale, do we then want more of it?
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How Prices Are Set, Common sense really
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- The higher the price of a good, the lessof it we want; the lower the price, the morewe want. This explains why
the demand curve slopes down from top left to bottom right.
CONVERSELY:
- The higher the price of a good, the more we are willing to supply; the lower the price, the less we are
willing to supply. This explains the supply curve sloping from bottom left to top right.
- Price is where buyers and suppliers cross paths (in the graph Q units are supplied at price P.)
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