MSU  AEC 2713  Class Notes  Week 5
View Full MaterialSchool: Mississippi State University
Department: Economics
Course: Intro to Food & Resource Econ
Professor: Danny Barefield
Term: Fall 2016
Tags: Econ, Economics, Microeconomic, and Microeconomics
Name: Intro to Food and Resource Economics Week Five
Description: this is the beginning of test two material. chapter 5 notes.
Uploaded: 09/19/2016
This preview shows pages 1  4 of a 16 page document.
Sign up
to view the rest of the content
Intro to Food and Resource Economics
Week 5: September 1216, 2016
if you do not understand chapter 4 you need to go back
and review because it is a very important chapter. Chapter 5: Elasticity and its Application Example:
You own a coffee shop and sell your lattes for the equilibrium
price of $3 each • However, your input costs are increasing and you are
contemplating a price increase to $4 per cup • You know that the Law of Demand says that you will sell fewer
cups of coffee if you increase the price, but you don’t know
how many fewer cups you will sell • How much will your revenue fall or increase? Elasticity: Elasticity measures the degree to which one variable (either
price or quantity) responds to changes in the other variable The Price Elasticity of Demand measures how much the quantity
demanded of lattes will fall if you raise your price • Elasticity is a numerical measure of the responsiveness of
quantity demanded or quantity supplied to one of its
determinants Price elasticity of demand price elasticity of demand = percentage change in quantity
demanded/ percentage change in price • The Price Elasticity of Demand measures the change in
quantity demanded resulting from a change in price Loosely
speaking, it measures the buyers’ responsiveness to changes
in price  when you work out a price elasticity of demand problem you will
get a negative number, don't remove the negative because it
illustrates the demand even though the negative is understood.
and review because it is a very important chapter. Chapter 5: Elasticity and its Application Example:
You own a coffee shop and sell your lattes for the equilibrium
price of $3 each • However, your input costs are increasing and you are
contemplating a price increase to $4 per cup • You know that the Law of Demand says that you will sell fewer
cups of coffee if you increase the price, but you don’t know
how many fewer cups you will sell • How much will your revenue fall or increase? Elasticity: Elasticity measures the degree to which one variable (either
price or quantity) responds to changes in the other variable The Price Elasticity of Demand measures how much the quantity
demanded of lattes will fall if you raise your price • Elasticity is a numerical measure of the responsiveness of
quantity demanded or quantity supplied to one of its
determinants Price elasticity of demand price elasticity of demand = percentage change in quantity
demanded/ percentage change in price • The Price Elasticity of Demand measures the change in
quantity demanded resulting from a change in price Loosely
speaking, it measures the buyers’ responsiveness to changes
in price  when you work out a price elasticity of demand problem you will
get a negative number, don't remove the negative because it
illustrates the demand even though the negative is understood.
To solve the problem of which way do you move along the curve we
will use a midpoint method to calculate the price elasticity of
demand. Price elasticity Problem:  Price elasticity of demand = [(Qd2Qd1)/Qmid]/ [(P2P1)/Pmid]
 Midpoints Q mid = (15 – 12)/2 + 12 = 13.5 P mid = ($4  $3)/2 + $3 = $3.50  Price Elasticity of demand = [(1512)/ 13.5]/ [(34)/ 3.50]  PE of D = [3/13.5]/ [1/3.50]  PE of D = 0.22/ 0.29  PE of D = 0.7 (Keeping in mind the graph below for further understanding)
 The price elasticity of demand changes as you move along the
demand curve  It is important to realize the portion of the demand curve for
which you are estimating the price elasticity of demand
will use a midpoint method to calculate the price elasticity of
demand. Price elasticity Problem:  Price elasticity of demand = [(Qd2Qd1)/Qmid]/ [(P2P1)/Pmid]
 Midpoints Q mid = (15 – 12)/2 + 12 = 13.5 P mid = ($4  $3)/2 + $3 = $3.50  Price Elasticity of demand = [(1512)/ 13.5]/ [(34)/ 3.50]  PE of D = [3/13.5]/ [1/3.50]  PE of D = 0.22/ 0.29  PE of D = 0.7 (Keeping in mind the graph below for further understanding)
 The price elasticity of demand changes as you move along the
demand curve  It is important to realize the portion of the demand curve for
which you are estimating the price elasticity of demand
 the negatives show that demand will fall and the number is the
percentage it will fall Topics regarding the price elasticity of demand: • The price elasticity of demand is closely related to the
slope of the demand ▪ The steeper the slope of the demand curve, the smaller
the price elasticity of demand ▪ The flatter the slope of the demand curve, the larger
the price elasticity of demand • Categories of the price elasticity of demand: • perfectly inelastic • inelastic • unitary elastic • elastic • perfectly elastic In a perfectly inelastic demand (one extreme case):  the demand curve is perfectly vertical  consumer price sensitivity is none  elasticity is 0  examples include:  pharmaceuticals such as insulin (if you need it you cant
go without it)  drinking water (you can’t go without it) In a inelastic demand:  If the absolute value of the price elasticity of demand is less
than 1.0, then the demand curve is said to be inelastic  the demand curve slope is relatively steep  consumer price sensitivity is relatively low
percentage it will fall Topics regarding the price elasticity of demand: • The price elasticity of demand is closely related to the
slope of the demand ▪ The steeper the slope of the demand curve, the smaller
the price elasticity of demand ▪ The flatter the slope of the demand curve, the larger
the price elasticity of demand • Categories of the price elasticity of demand: • perfectly inelastic • inelastic • unitary elastic • elastic • perfectly elastic In a perfectly inelastic demand (one extreme case):  the demand curve is perfectly vertical  consumer price sensitivity is none  elasticity is 0  examples include:  pharmaceuticals such as insulin (if you need it you cant
go without it)  drinking water (you can’t go without it) In a inelastic demand:  If the absolute value of the price elasticity of demand is less
than 1.0, then the demand curve is said to be inelastic  the demand curve slope is relatively steep  consumer price sensitivity is relatively low

A specific percentage change in price will result in a smaller
percentage change in quantity  Examples: required textbooks for a college course, gasoline (at
least in the short run) (price doesn’t matter you're still
going to buy it if you want it)  Price increases (decreases)  Revenue increases (decreases)  if you have an inelastic demand if you increase price you will
increase revenue. if you decrease price you decrease revenue. Unit Elastic Demand:  the demand curve slope is “intermediate”  consumer price sensitivity is “intermediate”  A specific percentage change in price will result in the same
percentage change in quantity  price change will have no effect on revenue Elastic demand:  If the absolute value of the price elasticity of demand is
greater than 1.0, then the demand curve is said to be elastic  the demand curve slope is relatively flat  consumer price sensitivity is relatively high  a specific percentage change in price will result in a greater
percentage change in quantity  price increases revenue decreases; price decreases revenue
increases  Examples: steak, candy, new automobiles Perfectly elastic demand (the other extreme case)  If the absolute value of the price elasticity of demand is
infinite (∞), then the demand curve is said to be perfectly elastic  the demand curve slope is 0 or flat  consumer price sensitivity is relatively high
percentage change in quantity  Examples: required textbooks for a college course, gasoline (at
least in the short run) (price doesn’t matter you're still
going to buy it if you want it)  Price increases (decreases)  Revenue increases (decreases)  if you have an inelastic demand if you increase price you will
increase revenue. if you decrease price you decrease revenue. Unit Elastic Demand:  the demand curve slope is “intermediate”  consumer price sensitivity is “intermediate”  A specific percentage change in price will result in the same
percentage change in quantity  price change will have no effect on revenue Elastic demand:  If the absolute value of the price elasticity of demand is
greater than 1.0, then the demand curve is said to be elastic  the demand curve slope is relatively flat  consumer price sensitivity is relatively high  a specific percentage change in price will result in a greater
percentage change in quantity  price increases revenue decreases; price decreases revenue
increases  Examples: steak, candy, new automobiles Perfectly elastic demand (the other extreme case)  If the absolute value of the price elasticity of demand is
infinite (∞), then the demand curve is said to be perfectly elastic  the demand curve slope is 0 or flat  consumer price sensitivity is relatively high
This is the end of the preview. Please
Sign up
to view the rest of the content
Join more than 18,000+ college students at Mississippi State University who use StudySoup to get ahead
16
Pages
28
Views
22
Unlocks
 Better Grades Guarantee
 24/7 Homework help
 Notes, Study Guides, Flashcards + More!
Join more than 18,000+ college students at Mississippi State University who use StudySoup to get ahead
School: Mississippi State University
Department: Economics
Course: Intro to Food & Resource Econ
Professor: Danny Barefield
Term: Fall 2016
Tags: Econ, Economics, Microeconomic, and Microeconomics
Name: Intro to Food and Resource Economics Week Five
Description: this is the beginning of test two material. chapter 5 notes.
Uploaded: 09/19/2016
16
Pages
28
Views
22
Unlocks
 Better Grades Guarantee
 24/7 Homework help
 Notes, Study Guides, Flashcards + More!
Recommended Documents
Join StudySoup for FREE
Get Full Access to
MSU  AEC 2713  Class Notes  Week 5
Already have an account?
Login here
Reset your password
I don't want to reset my password
Need help? Contact support
We're here to help
Having trouble accessing your account? Let us help you, contact support at +1(510) 9441054 or support@studysoup.com
Password Reset Request Sent
An email has been sent to the email address associated to your account.
Follow the link in the email to reset your password.
If you're having trouble finding our email please check your spam folder
Incorrect Password
The password used to log in with this account is incorrect
Forgot password? Reset it here