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# ECON111 Macroeconomics Chapter 5 Notes Econ 111

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This 0 page Class Notes was uploaded by Lauren Heller on Tuesday February 9, 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 19 views.

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Date Created: 02/09/16

Chapter 5 Elasticity 9 69 9 69 9 69 9 69 Elasticity a measure how much one variable responds to changes in another variable Price elasticity of demand measures how much quantity demanded responds to a change in price gt Percentage change in Qd percentage change in P Calculating percent changes standard method 0 end value start value old X 100 CANNOT USE TO CALCULATE ELASTICITY Loosely speaking it measures the pricesensitivity of buyers demand Is a pure number Should be negative Because along the demand curve price and quantity move in opposite directions which would make price elasticity negative We drop the minus sign and report all price elasticity s as positive numbers Use midpoint method to calculate price elasticity End value start value midpoint X 100 The midpoint is the number halfway between the start and end value the average of those values It doesn t matter which is start and which is end value Example P1 70 Qd15000 P290 Qd2300 Percent change in quantity 5000 3000 4000 50 Percent change in price 90 70 80 25 50 25 20 Price elasticity of demand curve gt the price elasticity of demand is closely related to the slope of the demand curve but it is not equal to the slope of the demand the reason for this is because slope is a ration of two changes and elasticity is a ration of two percent changes gt the atter the curve the bigger the elasticity gt the steeper the curve the smaller the elasticity There are ve different classi cation of the demand curve VVVV gt Elastic demand Demand curve relatively at Consumers price sensitivity relatively high Elasticity gt1 greater than 1 gt Inelastic demand Demand curve relatively steep vertical Consumers price sensitivity relatively low Elasticity lt1 less than 1 gt Unit Elastic Elasticity 1 equal to 1 gt Perfect inelastic demand Demand curve vertical Consumers price sensitivity none Elasticity 0 equal to zero gt Perfectly elastic demand Demand curve horizontal Consumers price sensitivity extreme Elasticity in nity equal in nity oz Elasticity determinant gt Elasticity is higher when close substitutes are available Number one determinant gt Price elasticity is higher for narrowly de ned goods than broadly de ned ones gt Price elasticity is higher for luxuries than for necessities gt Price elasticity is higher in the long run than the short run 0 Price Elasticity and total revenue gt A price increase has two effects on revenue Higher price means more revenue on each unit you sell But you sell fewer units lower quantity due to Law of Demand 0 When demand is elastic a price increase causes revenue to fall gt If demand is elastic then price elasticity of demand is less than one Percent change in quantity is greater than percent change in price The fall in revenue from lower quantity is greater than the increase in revenue from higher price so revenue falls 0 When demand is inelastic a price increase causes revenue to rise gt If demand is inelastic then the price of elasticity of demand is less than one Percent change in quantity is less than the percent change in price The fall in revenue from lower quantity is smaller than the increase in revenue from higher price so revenue rises oz Elasticity and Total revenue relationships gt With an elasticity equal to 1 No change in total revenue remains the same whether you raise the price or decrease it gt When demand is perfectly inelastic Quantity will not fall so revenue rises gt When demand is elastic Quantity will increase so revenue rises At points with a low price and high quantity the demand curve is inelastic At points with a high price and low quantity the demand curve is elastic Income elasticity of demand measures how the quantity demanded changes as consumer income changes gt Calculated by percent change in quantity demanded divided by percent change in income gt Normal goods have positive income elasticity s gt Inferior goods have negative income elasticity s oz Cross price elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another gt Calculated by percent change in quantity demanded of good 1 divided by percent change in the price of good 2 gt Substitutes have a positive cross price elasticity gt Compliments have a negative cross price elasticity oz Price elasticity of supply measures how much the quantity supplied responds to changes in the price gt supply is said to be elastic if the quantity supplied responds substantially to changes in price gt supply is said to be inelastic if the quantity supplied responds only slightly to changes in price gt calculate price elasticity of supply by percent change in quantity supplied divided by percent change in price 393 key determinant of price elasticity of supply is the time period gt supply is more elastic in the long run that in the short run oz Supply demand and Elasticity Together 0 O O 90 90 90 gt When demand is inelastic an increase in supply leads to a fall in price and an increase in quantity sold gt In the short run when supply and demand are inelastic a shift if supply lead to a large increase in price gt In the long run when supply and demand are elastic a shift in supply leads to a small increase in price

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