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Lecture 7 Notes: Chapter 5.1 and 5.2

by: Austin Copeland

Lecture 7 Notes: Chapter 5.1 and 5.2 Econ 2306

Marketplace > University of Texas at Arlington > Economcs > Econ 2306 > Lecture 7 Notes Chapter 5 1 and 5 2
Austin Copeland
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About this Document

These notes cover the end of 5.1 and 5.2 in addition to review for the test
Todd Gabel
Class Notes




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This 3 page Class Notes was uploaded by Austin Copeland on Wednesday February 10, 2016. The Class Notes belongs to Econ 2306 at University of Texas at Arlington taught by Todd Gabel in Spring 2016. Since its upload, it has received 18 views. For similar materials see Microeconomics in Economcs at University of Texas at Arlington.


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Date Created: 02/10/16
Notes Tues Feb 9   Econ 2306 – Todd Gabel Notes: Chapters 5.1 and 5.2 Highlighting Legend: Important Principle          Important Concept         Key Term Technical Issues with Demand  How will changes in a good affect the price of another good change? o Two types of relationships  Substitute Good  When price increases for one good, it’s substitute will see a rise in demand and visa versa  This causes a shift in demand rather than a movement  Example: Coke and Pepsi  Complementary Good  When the price increases for one good, it’s substitute will see a decrease in demand and visa versa  This again causes a shift in demand rather than a movement  Example: Peanut butter and jelly  How will a change in income affect demand? o Depends on the nature of the good o Types of good  Normal Good  Increase in income causes an increase in demand  A positive relationship between the two  Causes demand to shift rather than a movement  Example: Most goods are normal, education. More money means more education  Inferior good  Increase in income means a decrease in demand for inferior goods  An inverse relationship between the two  Causes a shift rather than a movement  Example: Instant noodles  Note: Just because a good is inferior does not mean that the good is trash, just relatively lower quality  How will a change in preferences affect demand? o Depends on how your preferences have changed o Example: During the holidays (Road trips) we would expect our demand for gas to increase o Causes a shift right  True or false Q’s o All goods cannot always be inferior at the same time.  True, when income increases you are going to consume higher quality goods o When the price increases demand goes down  False, when the price increase, quantity demanded falls not just demand o Goods must be either compliment or substitute.  False, goods can have no relation with each other  Some goods are bother compliments and substitutes  Hot dogs and hamburgers  Fuel-efficient cares and gas  Video games and HD TV’s Lecture 7 Misc.  Why are homes on expansive plots of land also expensive? o Fixed price of the lot is high; therefore, it lowers the relative price of the nice home. o Relative price:  How does a “war on drugs” help show the law of demand? o When something is illegal, you substitute towards a higher quality version o Therefore, the drugs are going to be higher quality which leads to more over doses Mid-Term stuff  Chapters 1,2,3,4 and 5.1 and 5.2  8 Questions each worth 5 points  4 Short Essay Questions  2 Problems  2 Short Answer  1 Bonus  Do 2 of the 3 problems  Some questions will come from the textbook Chapter 5.3 Elasticity of Demand  Revenue = Price x Quantity  Elasticity of demand (Specifically price) o Measuring the sensitivity of consumers to changes in the price of a good o If demand is sensitive then it makes more sense relative to revenue, to lower the price o Demand can either be elastic or in-elastic  Elastic: Sensitive to price change  In-elastic: Non-sensitive to price change o Elasticity gives us a number to the sensitivity of the change o When demand is inelastic you want to raise the price (incrementally) in order to create more revenue o Goods that tend to have a lot of substitutes tend to be elastic o Goods that tend to not have a lot of substitutes tend to be in-elastic o Degree of substitutability  Elasticity = % change in the Quantity demanded / % change in the price of the good o Note: % change Part / Whole o Change relative to its initial value (Final value – Initial value) / initial value o


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