# Mature of the good - Whether the good is 3 necessity or a luxury * The availability of close substitutes * How narrowly you define a good * The share consumer's budget spent on the good * The passage of ime A good with many close substitutes is likely to have relatively demand, because consumers can easily choose to purchase one of the close substitutes if the price of the good rises. & good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand? O vacht O A heart valve for heart attack victims Price elasticity for a good depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has the most elastic demand? O Laundry detergent O computer O salt The price elasticity of demand for a good also depends on how you defina the good. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to hawve the least elastic demand, and which will have demand that falls in between, Categories Most Elastic In Between Least Elastic | Clothing Q o O Boot-cut jeans O O O Pants O O O The price elasticity of demand is also affected by the given time period, sometimes called the time horizon. Compared to the short-run demand for oil, the demand for oil in the long run will tend to be elastic. The following graph input tool shows the daily demand for hotel rooms at the Big Winner Hotel and Casino in Las Vegas, Nevada. To help the hotel management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. These demand factors, along with the values corresponding to the initial demand curve, are shown in the following table and alongside the graph input tool. Demand Factor Initial Value Average American household income $50,000 per year Round trip airfare from San Francisco (SFO) to Las Vegas (LAS) $200 per round trip Room rate at the Lucky Hotel and Casino, which is near the Big Winner $250 per night Graph Input Tool (?) 500 Market for Big Winner's Hotel Rooms Price 300 (Dollars per room) Quantity 200 Demanded Hotel rooms per night) PRICE (Dollars per room) Demand Factors Demand Average Income 50 (Thousands of dollars) Airfare from SFO to 200 LAS Dollars per round 0 50 100 150 200 250 300 350 400 450 500 trip) QUANTITY (Hotel rooms) Room Rate at Lucky 250 (Dollars per night)For each of the following scenarios, begin by assuming that all demand factors are set to their original values and that Big winner is charging $300 per rogm per night. If average household income increases by 20%, from 50,000 to 60,000 per year, the quantity of rooms demanded at the Big Winner w from rooms per night to : rooms per night. Therefore, the income elasticity of demand is . meaning that hotel rooms at the Big Winner are v . If the price of an alrline ticket from SFO to LAS were to increase by 10%, from $200 to 220 round trip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Big Winner - from rooms per night to rocms per nlght Because the cross elasticity of demand is W, hotel rooms at the Big Winner and airline trips between 5F0 and LAS are s Big Winner is debating decreasing the price of its rooms to $275 per night. Under the initial demand conditions, you can see that this would causs its total revenue to W . Decreasing the price will always have this effect on revenue when Big Winner is operating on the W portion of its demand curve. Van is a retired teacher who lives in Chicage and does some consulting work for extra cash. At a wage of $30 per hour, he is willing to work 6 hours per week. At $50 per hour, he is willing te work 16 hours per week. Using the alasticity formula (calculated based on average change), the elasticity of van's labor supply between the wages of $20 and 530 per hour is approximataly w , which means that Van's supply of labor within this wage range is - The citizens of Splashville enjoy swimming all summer long. Assume that the quantity of swimsuits demanded in a given year depends only on the average temperature that summer and the price of swimsuits. Additionally, assume that the cost of Lycra (a synthetic elastic fabric used to produce close-fitting clothing such as swimsuits) represents the great majority of swimsuit manufacturers\" costs and that every other determinant of supply remains constant over this time period. The following table shows the average summer temperature and the price of Lycra in Splashville for each year from 1995 to 2007. Avg Temp Price of Lycra Year (F=) {Dollars per yard) 1985 75 a 1996 80 10 1997 85 10 1598 75 10 1999 80 7 2000 oo B 2001 85 7 2002 a5 B 2003 80 B 2004 8o 13 2003 8BS 12 2006 85 12 2007 75 12 The following diagram shows the price of swimsuits and the quantity of swimsuits sold in Splashville for each year from 1995 through 2007, On the following diagram, use the blue line (circle symbol) to connect all the points for which the average temperature was 85 degrees, Then use the grange line (square symbol) to connact all the points for which thae price of Lycra was $12 per yard. 50 + 2005 e &5 i