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EC 111- Week 3 notes

by: Matt Cutler

EC 111- Week 3 notes Econ 111

Matt Cutler
GPA 4.0
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Week 3 Notes on Equilibrium and Elasticity
Kent 0. Zirlott
Class Notes




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This 3 page Class Notes was uploaded by Matt Cutler on Sunday February 7, 2016. The Class Notes belongs to Econ 111 at University of Alabama - Tuscaloosa taught by Kent 0. Zirlott in Fall 2016. Since its upload, it has received 21 views.


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Date Created: 02/07/16
Equilibrium Monday, February 1, 2016 3:41 PM 1. Changes in Equilibrium a. Decide whether event shifts S curve, D curve, or both. b. Decide in which direction curve shifts. c. Use supply-demand diagram to see how the shift changes EQ P and Q. i. Ex: market for hybrids 1) Increase in price of gas a) Causes shift right in demand curve for hybrids b) Price and quantity go up 2) New technology reduces cost of producing hybrid cars. a) Supply curve shifts right b) Price falls, quantity rises 3) Price of gas rises AND new technology reduces production costs a) Both curves shift right b) Quantity rises, price is uncertain (because we don’t know how far the curves shifted) ii. Market for Ice Cream 1) Fall in the price of frozen yogurt a) Frozen yogurt is a substitute so demand curve shifts b) Demand curve shifts left c) Price and quantity drop 2) Fall in milk prices When S and D are shifting in the same direction; a) Input price: supply shift price will be unknown. b) Supply curve shifts right When S and D are shifting in opposite directions; quantity will be unknown c) Price falls, quantity rises 3) Fall in price of frozen yogurt AND fall in milk prices a) D shifts left, S shifts right b) Price falls, effect on Q is unknown Elasticity Wednesday, February 3, 2016 3:32 PM • Definition:Elasticity is a numerical measure of the responsiveness of Q or Q to one of its determinants • Basic idea: Elasticity measures how much one variable responds to changes in another variable. ○ One type of elasticity measures how much demand for your websites will fall if you raise your price. 1. Price elasticity of Demand ○ Price elasticity of demand= Percentage change in Quantity Demand/ Percentage Change in Price  Ex: price rises by 10%; Q falls by 15%  Price elasticity of demand= 15%/10%=1.5 (pure number, no units)  Always take the absolute value for elasticity of demand. ○ Percent change= (New-old)/old: CANNOT use <---- for elasticity ○ Midpoint method: (New-Old)/ Average= percentage change for Elasticity!! ○ Slope and elasticity are related but not the same thing ○ The flatter the curve, the bigger the elasticity ○ The steeper the curve, the smaller the elasticity Cutler, Matthew R at 2/3/20163:51 PM a. Five different classifications of D curves i. Elastic demand 1) Curve: relatively flat 2) Price sensitivity: relatively high (means Quantity demand changes a lot, more than price change) 3) Elasticity: greater than 1 ii. Inelastic demand 1) Curve: relatively steep 2) Price sensitivity: relatively low (Quantity only changes a little bit, changes less than price) 3) Elasticity: less than 1 iii. Unit elastic 1) Percentage change in price EQUALS the percentage change in quantity 2) Elasticity of 1 iv. Perfectly inelastic demand 1) Curve: Vertical 2) Price sensitivity: none (Q changes by 0% Price changes) 3) Elasticity: 0 v. Perfectly elastic demand (Demand curve for perfect competition: commercial fisherman, farmers) 1) Curve: Horizontal 2) Price sensitivity: Extreme (Q changes when price stays the same) 3) Elasticity: infinity b. Determinantsof Elasticity of Demand (in order of how powerful they are) i. Elasticity is higher when close substitutes are available. ii. Price elasticity is higher for narrowly defined goods than broadly defined ones 1) Ex: lucky brand jeans vs clothing (higher for jeans) iii. Price Elasticity is higher for luxuries than for necessities 1) Ex: Cruise vs insulin (higher for cruise) iv. Price elasticity is higher in the long run than the short run 1) Ex: gasoline in the short run vs gas in the long run (gas in long run is higher because more choices) c. Price Elasticity and Total Revenue  Revenue= Price x Quantity  Price effect= more price per unit  Price effect= more price per unit  Quantity effect= less units sold  Elasticity will tell you which one is bigger i. If demand is elastic (greater than 1) 1) A price increase causes revenue to fall (lost revenue due to lower Q exceeds increase revenue due to higher P) ii. If demand is inelastic (less than 1) 1) A Price increase causes revenue to increase (Price effect is larger than the quantity effect)


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