Chapter 5 - 7 Study Guide
Chapter 5 - 7 Study Guide ECO 106
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This 9 page Study Guide was uploaded by Sidney Hong on Wednesday October 28, 2015. The Study Guide belongs to ECO 106 at Pace University taught by Cesar Castope in Fall 2015. Since its upload, it has received 74 views. For similar materials see Principles of Economics: Macroeconomics in Economcs at Pace University.
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Date Created: 10/28/15
Fall 2015 Principles of Economics Micro ECO106 CRN 72490 MondayNVednesday 900 AM 1025 AM Professor Cesar Castope Course Text O39sullivan Sheffrin Perez Microeconomics Principles Applications and Tools Eighth Edition PearsonPrentice Hall 2013 ISBN013340387 Chapter 5 Elasticity Price of Elasticity Ed 0 Measures responsiveness of the quantity demanded to change in price 0 To compute price elasticity of demand we divide the percentage change in the quantity demanded by the percentage change in price and then we can take the absolute value of ratio 0 Ed Percentage change in quantity demanded Percentage change in Price absolute ratio 0 The law of demand tells us that the price and quantity demanded move in opposite directions 0 So the percentage change in quantity will always have the opposite sign of the percentage change In price If PEoD 0 o the Demand is Perfectly Inelastic Demand is unresponsive to price changes If PEoD lt 1 amp gt0 0 then Demand is Price Inelastic Demand is not sensitive to price changes If PEoD 1 c then Demand is Unit Elastic f PEoD gt 1 c then Demand is Price Elastic Demand is sensitive to price changes If PEoD infinity 0 then Demand is Perfectly Elastic Demand is extremely responsive to price changes I i i El LIIE ntity El Perfectly ilnelias ltic Demand Price 5 El LIIE ntity El Perfectly ilneliastic Demand Price in o Unit IE last German Fl 13 A 5 increase in DFEEE 21 ll ll 215i Eff ti i a l mu 55 a 5 decrease in quantity uemamas Determinants of Elasticity of Price Demand Elasticity is generally greater for goods that take a relatively part of a consumer s budget 0 Necessities Goods that represent a small part of the budget of the typical consumer demand is O relatively inelastic Another factor to determine the elasticity of demand is whether the product is a necessarily or luxury 0 good since the demand for luxury like restaurant meals foreign travel and motorboats is relatively elastic Another factor is the availability of substitute products 0 Close substitutes Elasticity at Price Zlfteniand and Tutsi Resenne Wh at happens tn tentat revenue Fed is inelastic and a raises its price Tntai reyenue increases Fed is elastic and a rm iwers its price Ttal revenue increases Fed is elastic a raises price Tntai reyenue dereases K r c when the price elasticity aidemand fur a gand is perfectly tnelastietE changes in the price d nut attect quantity demanded raising rice will cause ttal revenue tn increase When the price elasticity at demand fur a guard is relatively inelastic a it s Ed 4 I the percentage hange in quantity demanded is smaller than that in price iiencei when the price raised the tntal resenue rises When the price elasticity at demand Etcr a guard is unit at unitary elastic 2 all the percentage change in quantity is equal tcu that in prices sn a change in price will nut affect tatal revenue When the price elasticity at demand fur a gnnd is relatively elastic gs 4 Ea as e I the percentage change in quantity demanded is geatver that in price Hence when the price is raised the tntal revenue fails yice yersa When the price elasticity at demand Etcr a guard is perfectly elastic Ea is 2 El any increase in the prices n matter hnw smalls will cause demand fur the gland tn drup tn eercs Hence when the price is the tntal revenue falls tn serial Income Elasticity of Demand The demand titI a partieuar prcd39uct depends in an the cansntne Hs incense it measure the respcnsiyeness at demand tn changes in incamel indiating haw much mare nr less at a particular prcduct is purchased as incme changes The incnme elasticity at demand is de ned as the percentage change in Quantity demanded diyided by the percentage change in incarne Eti Percentage change in 1th Percentage change in henme Fr example it39a little increase in incnme increases the quantity atquot hits demanded 39th 135 the incume elasticity at demand tar hacks is 135i lids f tilts if incme elasticity is asitiyei it indicates a pcsiti ye relatiunship between ifncume demands we can say that we acnnsider the gds as nnrmal gnndst if incume elasticity is negative it indicates a negatiye relatinnship hetween incnme demand an we say that the grand is an inthricnr gind Fur esarnple interic r gnds has intercity hus travels used clnthingl and used cars Cross Elasticity of Demand This measures the responsiveness ctquot demand te changes in the prices ef ether gedsf indicating hew rnuch mere r less eat a particular geed is puhased as ether prices changes Basically this defines the percentage change in the quantity demanded elf ene geed ER divided ever the percentage change in the price at anether geed Tic Eille percentage change I39llilnantittr demanded iJercentage change in Price sti ed T Twe grands are ce nsidered substitutes if there is a asitiye relatienship hetween the quantity demanded cf ene geed and the price ef anether ged Fer example increase in the price f increases the demand tier apples as censumers suhstitute apples fer the netsquot relatinerr expenses bananas Fer snhstitute geedisa the crass price elasticity pesitiye centrasL tww geeds are censidered cernplements if there is a negative relatienship hetween the quantity demanded ef ene geed and the price nil anethen Fer example an increase in the price ef ice cream increases the cest inf apple pie with ice creams causing censurners te demand fewer apple Fer emplementary geedsi the crass price elasticity is negative Price Elasticity of Supply ifterent t es eff Easticity cf Supply if PEeS is the duly Perfectly inelastic Supply is unrespnsiye ta price changes PFeE at 1 Tell then Supply is Price inelastic ES uppr is net sensitive tn price changes if PEeS I then Supply is Unit Elastic it PEeS 1 then Supply is Price Elastic Supply is sensitive tn price changes if PEeS infinityg then E uply is Perfectly Elastic Supply is extremely respensiye te rice changes Pt measure rat the respensixeness cf the quantity supplies te changes in price equal tn the percentage change in quantity supplies divided lay the percentage change price Enid rcentage change in lQuantity Supplied itquot Percentage change in Price Example Price etrnillc increases IFm Ell te 11 the Quantity supplied increase trm 111M rnillien gallenis peint ai tn Elli millin galle ns pieint hit The rcentage change in Enidl lilti ll39ll fill f L1H L 1 Neill 2 g ail 3c the elasticity e f supplyr is inelastic The steeper the curve the less elastic the supply curve New letls leeh at anether example Price cf ntillt inreases irenit 1 Jill te Elli the IQuantity supplied increase trem film rnillien gallens peint a te Elill millien gallens paint h The percentage change in Enid liti lllll new LED 1 Milli HEMP 25 Sn the elasticity ef supply is elastic flatter the curse the mere elastic the suply curse Chapter 6 Market Efficiency and Government Intervention Learning Objectives 1Use demand and supply curves to compute the value of markets 2Expain why the market equilibrium maximizes the value of a market 3Describe the market effects of price controls 4Describe the market effects of quantity controls 5Explain how a tax is shifted to consumers and input suppliers A market equilibrium will generate the largest possible surplus when four conditions are met 0 No external bene ts The benefits of a product a good or service are confined to the person who pays for it No external costs The cost of producing a product is confined to the person who sells it Perfect information Buyers and sellers know enough about the product to make informed decisions about whether to buy or sell it 0 Perfect competition Each firm produces such a small quantity that the firm cannot affect the price Demand Curve 0 The maximum amount a consumer is willing to pay for a product Consumer Surplus The amount a consumer is willing to pay for a product minus the price the consumer actually pays Supply Curve 0 The minimum amount a producer is willing to accept as payment for a product equal to the marginal cost of production Producer Surplus o The price a producer receives for a product minus the marginal cost of production Price Ceiling 0 Maximum price set by the government Price Floor 0 A minimum price set by the government Market Equilibrium o The market equilibrium maximizes the total surplus of the market because it guarantees that all mutually beneficial transactions will happen Market Intervention Prisus per apartment Price per pinuntil o For a market that meets the four efficiency conditions the market equilibrium generates the largest possible total surplus so government intervention can only decrease the surplus and cause inefficiency 9M Supply Fries psi npnrtmunl a 139 Demand Eis 1 mu Quantity nf apartments A Market Equilibrium sum D msstiu supply 39Thtull supply dumustic plus farsign l I 2 at Miillliuns uf puunds uni sugau per Clay 1 Fuss Trade with Nu Domestic li39roduntinn sou SSH Sill asparagusgain Ingaiv I I I I I ll I I ll I I ll I Dumund Price PET mund m mun Quantity uf apartments ms 39 39 IE Rent Cnntm quot b unnsumsr 39 surplus r Dnmustiu supply us pruduuur surplus F D2 and Milliuns nf pounds inf sugar per day impart Ban and Dumuslin Fwdusiiun New S39uply NEW Supply wirh tax with tax Supply r a rzv In f Price Price Deana Demand Quantity Quantity A Inelastic Demand H E astir Demand New supply with M ta Initial supply 3 Price per pound Demand 0 40 uh Thougandg of pounds of fish per day Deadweight Loss from TaxationExcess Burden o The difference between the total burden of a tax and the amount of revenue collected by the government Chapter 7 Utility Learning Objectives 1Expain the equimarginal principle and apply it to consumer choice 2Describe the income and substitution effects of a price change 3Describe the general process involved in the valuation of the benefits and costs of a consumer good 4Appy the insights from neuroscience to consumer decisions about nutrition and saving 2739 24 Quantity of books 39 Budget line l Quantity of movies 35m w agnn ns a 26m 225 ivmvmrviiiq 39 39 Tm utility A U Equimarginal Rule Pick the combination of two activities where the marginal benefit per dollar for the first activity equals the marginal benefit per dollar for the second activity Substitution Effect The change in quantity consumed that is caused by a change in the relative price of the good with real income held constant Income effect go rnnn guenynm 9 Movies Marginal utility 36 I 5 i B 9 Movies The change in quantity consumed that is caused by a change in real income with relative prices held constant Decrease in Price Util Price 2 3 Movies DIME per Price l Btu ks
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