microeconomics ch 6 elasticity
microeconomics ch 6 elasticity ECON 211
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This 3 page Class Notes was uploaded by Addie Pearson on Friday April 8, 2016. The Class Notes belongs to ECON 211 at Clemson University taught by prof fiore in Winter 2016. Since its upload, it has received 11 views. For similar materials see Micro Economics in Economcs at Clemson University.
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Date Created: 04/08/16
CH 6 Slope of demand cure and elasticity of demand Qd= 100-2P: slope=-2 So the elasticity changes along a linear demand curve - elasticiy and slope are different - As a price rises, demand becomes more elasticfj But AT THE SAME PRICE, a steeper slope generally signifies less elastic demand Total revenue and elasticity of demand - Total reanue= price x quantity (TR = PxQ) - If a firm changes price, what happens to it’s total revenue? o Depends on elasticity of demand Total revenue and elasticity of demand: summary (IT WAS WRONG???) Absolute value of e0 Name How revenue changes with price Total revenue and elasticity of demand: some applications 1. Two of the most common products to offer coupons are breakfast cereals and household cleaners. Why? a. These producs have a lot of good substitutes b. These products have very ELASTIC demand c. Drop price raise revenue 2. What advantage is there to the seller from giving out coupons rather than just lowering prices? a. People who use coupons are likely to be more price sensitive (more elastic demand) b. Seller wants to charge a lower price to elastic demanders and a higher price to inelastic demanders 3. Why can you purchase a ticket to fly on the very same flight for less if you buy it a month in advance instead of 3 days before? a. Demand a month in advance is relatively elastic b. Demand 3 days before is relatively inelastic c. Airlines want to charge a lower price to elastic demanders and a higher price to inelastic demanders CONCLUSION - If demand for your product is elastic… o You should drop your price (ex have a sale) to increase your total revenue o Raising price will decrease your total revenue - If demand for your product is inelastic… o You can raise your price without losing a bunch of buyers; thus increasing your total revenue o Raising price will increase your total value ELASTICITY OF SUPPLY The law of demand says “price up quantity down, vice versa” - But by how much does quantity demanded fall or rise? - Ex: two different supply curves for the same market… - Equations: o Elasticity of supply: Es = (% change in Qs)/(% change in P) o Supply is ELASTIC if Es >1 o Supply is INEALSTIC if Es<1 o Supply is UNIT ELASTIC if Es=1 o Note: elasticity of supply is ALWAYS POSITIVE o Law of supply positive relationship What determines elasticity of supply? - Remember that supply curves reflect COST - Elasticity of supply depends on how fast the costs of supplying rises when quantity rises. Why does the price of roses rise more than the price of chocolate come Valentine’s Day? - Roses cost rise faster than chocolates cost when increasing their quantities supplied. - Roses supply curve steeper than chocolates; price goes up when demand shifts up/left Elasticity of supply and time - Supply is always more elastic in the long-run than the short-run o Supplier has more time to adjust and options become less costly o Ex: opening a new factory is less costly over a longer period of time as opposed to getting it done today Perfectly elastic supply - If supply is perfectly elastic, Es=infinity - This would imply that quantity supplied can be expanded without raising per unit costs - What must the supply curve look like? (straight horizontal line) Perfect inelastic supply - If supply is perfectly inelastic, Es=0 - This would imply that there are no increase in quantity supplied regarless of the size of the increase price - What must the supply curve look like? (straight vertical line)
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