Chapter 5 Economics 110
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This 3 page Study Guide was uploaded by Fiona Coupe on Friday February 6, 2015. The Study Guide belongs to Economics 110 at University of Alabama - Tuscaloosa taught by Harold Elder in Winter2015. Since its upload, it has received 253 views.
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Date Created: 02/06/15
Chapter 5 Elasticity and Its Application Elasticity measures how much buyers and sellers respond to changes in market condition 51 THE ELASTICITY OF DEMAND Last chapter we discussed demand was qualitative not quantitative 0 To measure changes we use elasticity 51a The Price Elasticitv of Demand and its Determinants Law of demand states that fall in price of good raises the quantity demanded Price of elasticity demanded measure of how much the quantity demanded of a good responds to a change in the price of that good computed as the percentage change in quantity demanded divided by the percentage change in price 0 Demand is inelastic if quantity demanded responds only slightly to changes in price Availability of Close Substitutes Goods with close substitutes tend to have more elastic demands 0 Le small increase in price causes quantity sold to fall by a lot Necessities vs Luxuries Necessities tend to have inelastic demand luxuries tend to be elastic De nition of the Market Narrowly de ned markets tend to have more elasticity than broadly de ned markets because it is easier to nd close substitutes for narrowly de ned goods Time Horizon Goods have more elastic demand over time as people have the opportunity to adapt to the change 51b Computing the Price Elasticity of Demand 0 Price is computed as the percentage change in the quantity demanded divided by the percentage change in the price Peruw z g e charng in quantity demanded Price elasticity tilquot EEEE aiIfl a Ellemming gimme m Emilee 51c The Midpoint Method A Better Wav to Calculate Percentage Change and Elasticity 432 I Q i Milli quot5quot Q1 LEE P22 m Pilf39ll s quotlquot PINE I Prim3 laatitzitjr uf climmti 51d The Variety of Demand Curves Economists classify demand curves according to their elasticity 0 Demand is considered elastic when the elasticity is greater than 1 0 Demand is inelastic when the elasticity is less than 1 o The atter the demand cure that passes through a given point the greater the price of elasticity demand 0 The steeper the demand curve that passes through a given point the smaller the price of elasticity demand 51e Total Revenue and the Price Elasticitv of Demand 0 Total revenue amount paid by buyers and received by sellers of a good computed as the price of the good times the quantity sold 0 Total revenue is PxQ 0 When demand is inelastic price and total revenue move in the same direction if price increases total revenue increases 0 When demand is elastic price and total revenue move in opposite directions fthe price increase total revenue decrease If demand price is elastic price elasticity equal to 1 total revenue remains constant when the price changes 51f Elasticity and Total Revenue along a Linear Demand Curve 0 Straight slope is constant because the ration change in price is equal to the change in quantity 0 Elasticity is not constant 0 At points with a low price and high quantity the demand curve is inelastic At points with a high price and low quantity the demand curve is elastic 51d Other Demand ElasticitV Are other descriptions of demand in addition to demand The Income of Elasticity of Demand 0 Income elasticity demandmeasure of how much the quantity demanded of a good responds to a change in consumers income computed as percent change in quantity demanded divided by percent change in income a n P r i t e ehe ee in EL Hermite l lmd lemme eleeljejty eelquot demand 35 w 1 1 Peree te elmne in iinenme Normal goods have positive income elasticity 0 Interior goods have negative income elasticity The CrossPrice Elasticity of Demand Crossprice elasticity of demand measure of how much that quantity demanded of one good responds to a change in price of another good r Pereen tege change in quantity demanded ef genre 1 Cmeepmee eimetlelty e1 demand Fereeutege eheelge in the price ef geetl E Substitutes have positive crossprice elasticity and complements have negative crossprice elasticity 52 THE ELASTICITY OF SUPPLY 52a The Price Elasticity of Supply and its Determinates Price elasticity od demand measure of how much the quantity supplied of a good responds to a change in the price of that good 0 Supply of good is elastic if the quantity supplied responds substantially to changes in price 0 Supply is inelastic if the quantity supplied responds slightly to changes in price 0 In most markets a key determinant of price elasticity of supply is the time period being considered 0 Supply is usually more elastic in the long run Hard to openclose factories in short time frame 52b Computing the Price Elasticity of Supply P ementage muge in t1 umtit 3 Stl jpliEll Price elmlitily of Eitljj jr39 2 j I ammo tinge change 111 ITEMTIE 52c The Variety of Supply Curve 0 Price elasticity if supply is re ected in supply curve Perfectly inelasticsupply curve is zero quantity supplied is same regardless of price 0 As elasticity rises supply curve gets atter Low levels of quantity supplied the elasticity of supply is high 0 To induce rms to produce more factories the price must rise a lot so supply is less elastic 53 THREE APPLICATIONS OF SUPPLY DEMAND amp ELASTICITY 53a Can Good News for Farming be Bad News for Farmers Increase in food supply with inelastic food demand caused revenues to fall 53b Why did OPEC fail to keep the Price of Oil High 0 In shortrun cant do much because of inelastic supply and demand 0 In longrun consumers can change their hearts 53c Does Drug Interdiction Increase or Decrease DrugRelated Crime 0 At rst raises the price and quantity supplied of a drug but the demand does not change 0 Crime heightens because drug addicts need more money to support their habits
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