Macro Chapter 5 Notes
Macro Chapter 5 Notes EC 111
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This 5 page Class Notes was uploaded by Carter Cox on Sunday February 7, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 48 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 02/07/16
Chapter 5 Notes: Macro Elasticity – measures how much of a variable responds to different changes in another variable - One type of elasticity measures how much demand for your websites will fall if you raise your praise - Elasticity is a numerical measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants Price Elasticity of Demand - Percentage change in Quantity Demanded divided by percentage change in price - Measures how much quantity demanded responds to a change in price - Measures the price sensitivity of buyers demand - Elasticity is pure number Calculating Percentage Changes - ((end value- start value)/ (start value)) - Midpoint method is the average - Midpoint is the number halfway between the start and the end values, the average of those value - Doesn’t matter which number is the “start” and the “end” you get the same answer Example: Price= 70 Quantity Demanded= 5000 Price= 90 Quantity Demanded= 3000 What is the Percent change in price? (90- 70)/ 80= .25 Then multiple the .25 by 100 which gives you 25% What is the percent change in demand? (5000-3000)/ 4000= .50 Times the .50 by 100 which gives you 50% Variety of Demand Curves - The slope is the ratio of two changes and elasticity is a ratio of two percent change Rule of thumb: the flatter the curve, the bigger the elasticity The steeper the curve the smaller the elasticity Five different demand curves 1. Elastic Demand: relatively flat curve a. Consumers price sensitivity i. Relatively high ii. Elasticity is greater than 1 2. Inelastic Demand a. Demand curve is relatively steep b. Consumers price sensitivity: relatively low c. Elasticity is less than 1 3. Unit Elastic Demand a. Demand curve is intermediate slope b. Consumers price sensitivity is intermediate c. Elasticity is 1 4. Perfectly Inelastic Demand a. Demand curve is perfectly vertical b. Consumers price sensitivity: there is none c. Elasticity is zero 5. Perfectly Elastic Demand a. Demand curve is horizontal b. Consumers price sensitivity is extreme c. Elasticity: infinity What determines price elasticity? - Looking at a series of examples that are comparing two common goods 3 - Example: 1. Suppose the prices of both goods rise by 20% 2. The good for which quantity demanded falls the most (in percent) has the highest price elasticity of demand Example: Breakfast cereal VS. Sunscreen - Breakfast cereal has close substitutes so consumers 1. Waffles, oatmeal, and grits are all different substitutes for a breakfast meal. So the consumers can easily switch if the price rises - Sunscreen: has no substitutes, so consumers would probably not buy much less if its prices rise. - Price elasticity is higher when close substitutes are available - Price elasticity is higher for luxuries than for necessities - Price elasticity is higher for narrowly defined goods than broadly defined goods - Price elasticity is higher in the long run than in the short run Determinants of Price Elasticity: - The extent to which close substitutes are available - Whether the good is a necessity or a luxury - How broadly or narrowly the good is defined - The time horizon- elasticity is higher in the long run than the short run Luxury is something you want Necessity is something that you need to survive Price Elasticity and Revenue - Revenue = price times quantity - A price increase has two effects on the revenue 1. Higher price means more revenue on each unit you sell 2. But you sell fewer units (lower quantity) due to law of demand 3. If demand is elastic, then price elasticity of demand is greater than 1 4. If demand is inelastic then the price elasticity is less than one 5. When demand is elastic a price increase causes revenue to fall 6. When demand is inelastic a price increase causes revenue to rise Price elasticity of supply - Measures how much quantity supply responds to a change in price - Measures sellers price sensitivity - Also uses midpoint method - Percent change in quantity supplies/ percent change in price Variety of supply curves - Slope of the supply curve is closely related to price elasticity of supply - Flatter the curve the bigger the elasticity - Steeper the curve, the smaller the elasticity Five classifications Inelastic - Supply curve- relatively steep slope - Sellers price sensitivity is low - Elasticity is less than one Unit Elastic - Supply curve- has intermediate slope - Intermediate price sensitivity - Elasticity is equal to one Elastic - Supply curve is relatively flat - Price sensitivity is high - Elasticity is greater than one Perfectly Elastic - Supply curve is horizontal - Price sensitivity is extreme - Elasticity is infinity Perfectly inelastic - Supply curve is vertical - Price sensitivity is none - Elasticity is zero Determinants of Supply Elasticity - More easily sellers can change the quantity they produce, the greater the price elasticity of supply - For many goods, price elasticity of supply is greater in the long run than in the short run, because new firms can build new factories, or new firms may be able to enter the market. Other Elasticities - Income elasticity of demand: measures how the response of quantity demanded to a change in consumer income 1. For normal goods income elasticity is greater than zero 2. For inferior goods, income elasticity is less than zero - Cross price elasticity of demand 1. Measures demand for one good to changes in price of another good 2. Percent change in quantity demanded for good 1 divided by percent change in price of good 2 3. For substitutes cross price elasticity is greater than zero 4. Complements are less than zero
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