Chapter 5 notes Zirlott
Chapter 5 notes Zirlott EC 111
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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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