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Chapter 5 notes Zirlott

by: Julie Palatella

Chapter 5 notes Zirlott EC 111

Julie Palatella

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zirlott's chapter 5 notes
Principles of Macroeconomics
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This 4 page Class Notes was uploaded by Julie Palatella on Monday February 8, 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: 02/08/16
Chapter 5 Notes Elasticity: how much one variable responds to changes in another variable Price Elasticity of Demand = % change in Quantity Demanded/ % Change in Price Calculating Percentage Changes: end value – start value/start value x 100%  Going from point A to point B, the % change in P equals….  Or [new-old/old]  **you cannot use new-old/old to calculate elasticity**  Midpoint Method: the average of the numbers halfway between the start and end values  it doesn’t matter which value you use as the “start” and “end” (same answer either way) The Variety of Demand Curves: The price elasticity of demand is not equal to the slope of the demand curve.  The flatter the curve the bigger the elasticity  The steeper the curve the smaller the elasticity “Elastic Demand”  Price elasticity of demand = % change in Quantity/ % change in Price  > 10%/10% > 1  Demand curve is relatively flat  Consumers price sensitivity is relatively high  Elasticity is >1 Inelastic Demand  Something you are going to buy anyways  Demand curve is relatively steep  Consumers price sensitivity is relatively low  Elasticity is <1 Unit Elastic Demand  Elasticity is = 1  Diagonal line Perfectly Inelastic Demand  An extreme case  Demand curve is a perfect vertical line  Consumers price sensitivity = none  No change in Quantity if price changes  Elasticity = 0 Perfectly Elastic Demand  Elasticity = to infinity  Demand curve is perfectly horizontal  Consumers price sensitivity is extreme Things to Note:  Price elasticity is HIGHER when close substitutes are available  Price elasticity is higher for narrowly defined goods than broadly defined ones  Price elasticity is higher for luxuries than for necessities o Necessities= elastic needs (food, insulin) o Luxuries= inelastic (yacht, cruise)  Price elasticity is higher in the long run than the short run Price Elasticity and Total Revenue  Price elasticity of demand = % change in Q/% change in P  if demand is elastic the price elasticity of demand is >1  higher price = higher revenue on each unit sold  if demand is inelastic then price elasticity is <1  Ex: Pharmacies raise the price of insulin by 10%. Does the revenue on insulin rise or fall? A- Since demand is perfectly inelastic, quantity will not fall, so revenue rises. Price Elasticity of Supply  Price elasticity of supply = % change in Quantity Supplied/ % change in Price  Measures how much Quantity Supplied responds to change in Price  Use the midpoint formula to find percentage changes 2 Determinants you need to know o how easy it is for sellers to change the quantity they produce (elastic)  if its difficult to change the amount to produce the supply is inelastic o time  elasticity of supply is greater in the long run than in the short run The Variety of Supply Curves  The flatter the curve the bigger the elasticity  The steeper the curve the smaller the elasticity Inelastic  price elasticity of supply= % change in Q/% change in P  Elasticity is <1  Supply curve is relativity steep, sellers price sensitivity is relatively low Unit Elastic  Elasticity is = 1  Supply curve is immediate slope, sellers price sensitivity is intermediate Elastic  Elasticity is >1  Supply curve is relatively flat, price sensitivity = relatively high Perfectly elastic  Elasticity= infinity  Supply curve horizontal, sellers price sensitivity is extreme Perfectly inelastic  Elasticity = 0  Supply curve = vertical  No seller price sensitivity Things to Note:  The easier sellers can change the quantity they produce the greater the price elasticity of supply  Price elasticity of supply is greater in the long run than short run o Firms can build new factories o New firms can enter the market  An increase in income causes an increase in demand for a NORMAL GOOD  Normal goods income elasticity > 0  Inferior goods, income elasticity < 0  Substitutes cross price elasticity > 0  Complements cross price elasticity < 0 Income elasticity of demand  % change in Quantity demanded / % change in income Cross Price elasticity of demand (DO NOT NEED TO KNOW HOW TO CALCULATE FOR EXAM 1)  % change in quantity demanded for good 1/ % change in price of good 2


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