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## Microeconomics Chapter 4 Study Guide: Elasticity

by: Katie Mulliken

7

0

7

# Microeconomics Chapter 4 Study Guide: Elasticity ECON2106

Marketplace > University of Georgia > Economics > ECON2106 > Microeconomics Chapter 4 Study Guide Elasticity
Katie Mulliken
UGA
GPA 3.91

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Microeconomics Chapter 4 Study Guide: Elasticity. Combo of class notes/lectures & textbook notes with practice problems
COURSE
Microeconomics
PROF.
Till Schreiber
TYPE
Study Guide
PAGES
7
WORDS
CONCEPTS
Econ, Economics, Microeconomics, Microeconomic, elasticity
KARMA
50 ?

## Popular in Economics

This 7 page Study Guide was uploaded by Katie Mulliken on Thursday September 22, 2016. The Study Guide belongs to ECON2106 at University of Georgia taught by Till Schreiber in Fall 2016. Since its upload, it has received 7 views. For similar materials see Microeconomics in Economics at University of Georgia.

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Date Created: 09/22/16
Microeconomics Chapter 4: Elasticity When Supply Decreases: Equilibrium Price rises & Equilibrium Quantity decreases The amount that Price rises & Quantity decreases depends on the responsiveness of Quantity Demanded of a good to a Δ in its price  Slope of the Demand Curve o If Demand Curve is Steep, the Price rises by a lot o If Demand Curve is Almost Flat, the Price barely rises o Slope of Demand Curve depends on the units in which we measure Price & Quantity o Elasticity – measures responsiveness and is independent of units of measurement Price Elasticity of Demand – a units-free measure (independent) of the responsiveness of Quantity Demanded of a good to a change in its Price  Express Δ in Price as the percent of the average price (avg. of initial & new price)  Express Δ in Quantity Demanded as a percent of the average Quantity Demanded (“) Price Elasticity of Deman: Percent Change in the Quantity Demanded Percent Change in the Price Initial Price of a pizza: \$20.50 Initial Quantity Demanded: 9 pizzas / hour Price of Pizza Falls to: \$19.50 Quantity Demanded Rises to: 11 pizzas / hour  Price falls by \$1  QDemanded rises by 2 pizzas / hour Average Price: \$20 Average QDemanded: 10 pizzas / hour Percent Change in Quantity Demanded: %ΔQ Δ Q ÷ Q avgx 100  (2 ÷ 10) x 100 = 20% Percent Change in Price: %ΔP Δ P ÷ P avgx 100  (\$1 ÷ \$20) x 100 = 5% Price Elasticity of Demand: %ΔQ ÷ %ΔP = [20% ÷ 5%] = 4 Average Price & Average Quantity  Using the averages, we get the same Elasticity value regardless if the price rises or falls Percentages & Proportions  The ratio of 2 Proportionate changes is the SAME as the ratio of 2 Percentage changes %ΔQ ÷ %ΔP = ΔQ ÷ ΔP Elasticity is a Percent ratio, so changes in unit of measurement for Price or Quantity will yield the same elasticity value  Elasticity Formula yields a negative value, bc Price & Quantity move in opposite directions  The Magnitude (absolute value) tells how responsive the Quantity Δ is to a Price Δ Demand can be: a) Inelastic, b) Unit Elastic, or c) Elastic& can range from {0– ∞} Perfectly Inelastic Demand If the Price changes & Quantity Demanded doesn’t change: Price Elasticity of Demand is zero & the good has Perfectly Inelastic Demand Demand Curve: Vertical Unit Elastic Demand If %Δ Quantity Demanded = %Δ Price Price Elasticity of Demand = 1 & the good has Unit Elastic Demand (Demand Curve v declining slope) Perfectly Elastic Demand If %Δ in Quantity Demanded is high & Price barely changes: Price Elasticity of Demand is ∞ & The good has Perfectly Elastic Demand Demand Curve: Horizontal Inelastic Demand If %Δ Quantity Demanded smaller than %Δ Price: Price Elasticity of Demand is less than 1 Elastic Demand If %Δ Quantity Demanded greater than %Δ Price: Price Elasticity of Demand is more than 1 Factors that Influence the Elasticity of Demand:  The closeness of substitutes o The closer the substitutes for a good, the more Elastic the Demand for the good o Necessities (food, shelter) generally have Inelastic Demand o Luxuries (exotic vacations: normal goods) generally have Elastic Demand  The proportion of income spent on that good o The greater the proportion of consumers’ income that is spend on a good; The larger Elasticity of Demand for that good  The time elapsed since a price change o The longer consumers have to adjust to price change, or the longer a good can be stored w/o losing its value; The more Elastic Demand for that good Linear Demand Curve shows: ΔDemand of Elasticity @ midpoint, Demand is Unit Elastic  Demand is ELASTIC above the mid-point  Demand is INELASTIC below the mid-point – If Price falls from \$25  \$15; Quantity Demanded rises 0  20 pizzas/hr Avg. Price: \$20 Avg. Quantity Demanded: 10 pizzas Price Elasticity of Demand: (\$20 ÷ 10 pizzas÷ (\$10 ÷ 20 pizzas= 4 Elasticity =1/4 – If Price falls from \$10  \$0; Quantity Demanded rises from 30  50 pizzas/hr Avg. Price: \$5 Avg. Quantity Demanded: 40 pizzas Price Elasticity of Demand: (\$20 ÷ 40 pizzas÷ (\$10 ÷ \$5) Price Elasticity of = ¼ Demand: %ΔQDemanded Total Revenue from sale of a Good = Price of the Good x Quantity Sold (a rise in price doesn’t always mean a rise in total revenue) Δ in Total Revenue due to a Δ in Price depends on the Elasticity of Demand: If Demand is Elastic, a 1% price cut increases Quantity sold by more than 1%  Total Revenue Increases & your expenditure on the item Increases If Demand is Inelastic, a 1% price cut increases Quantity sold by less than 1%  Total Revenue Decreases & your expenditure on the item Decreases If Demand is Unit Elastic, a 1% price cut increases Quantity sold by 1%  Total Revenue is Unchanged & your expenditure on the item Doesn’t Change Total Revenue Test – method of estimating the Price Elasticity of Demand by observing the ΔTotal Revenue that results from a ΔPrice  If a price cut Increases Total Revenue, Demand is Elastic  If a price cut Decreases Total Revenue, Demand is Inelastic  If a price cut leaves Total Revenue unchanged, Demand is Unit Elastic Price vs. Quantity Demanded @ \$12.50 a pizza, Demand is Unit As pizza Price falls \$25  \$12.50 Revenue stopsal Quantity Demanded increases from 0  25 pizzas/hr Demand is Elastic & Total Revenue Increases @ 25 pizzas/hr, Demand is Unit Total Revenue vs. Quantity Demanded Elastic & Total Revenue is at is Since (^) a Price cut increases Total Revenue, Demand is Elastic As Quantity increases from 0  25 pizzas/hr Demand is Elastic & Total Revenue Increases As Price of a pizza falls from \$12.50  \$0 The Quantity Demanded increases from 25  50 pizzas/hr Demand is Inelastic & Total Revenue Decreases Income Elasticity of Demand – measures how the Quantity Demanded of a good responds to a change in income Income Elasticity of Demand = % Δ in Quantity Demanded % Δ in Income Income Elasticity of Demand is greater than 1, Demand is Income Elastic & good is Normal Good Income Elasticity of Demand is greater than 0, but less than 1; Demand is Income Elastic & good is Normal Good If Income Elasticity of Demand is less than 0 (negative), the good is an Inferior Good Cross Elasticity of Demand – measures the responsiveness of Demand for a good to a change in the Price of a Substitute (positive) or a Complement (negative) Cross Elasticity of Demand = % Δ in Quantity Demanded % Δ in Price of a Substitute or Complement Ex: When Price of a burger (pizza substitute) rises, the Quantity of Pizza Demanded Increases When Price of a soda (pizza complement) rises, the Quantity of Pizza Demanded Decreases When Demand for a good Increases: Equilibrium Price Rises & Equilibrium Quantity of good Increases How much the Price rises/ Quantity increases depends on the responsiveness of the Quantity Supplied of a good to a Δ in the goods Price  the Elasticity of Supply of the good Elasticity of Supply – measures responsiveness of the Quantity Supplied to a Δ Price of a good Elasticity of Supply = % Δ in Quantity Supplied % Δ in Price Supply is: Perfectly Inelastic Unit Elastic Perfectly Elastic If Supply Curve is vertical If Supply Curve is linear if Supply Curve is horizontal & Supply Elasticity = 0 & passes thru origin (slope irrelevant)& Supply Elasticity is ∞ Factors that Influence Elasticity of Supply:  Resource Substitution Possibilities – the easier it is to substitute among the resources used to produce a good/service, the greater its Elasticity of Supply  Time Frame for Supply Decision – the more time that passes after a Price change, the greater the Elasticity of Supply o Momentary Supply – is Perfectly Inelastic. The Quantity Supplied following a price change is constant o Short-Run Supply – is somewhat elastic o Long-Run Supply – is most elastic

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