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MicroEc Chapter 6 Notes

by: Shanee Boone

MicroEc Chapter 6 Notes Econ 1002

Marketplace > Temple University > Economcs > Econ 1002 > MicroEc Chapter 6 Notes
Shanee Boone

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About this Document

•More chapter 6 notes coming with beginning of Chapter 7 notes
Principles of Economics: Microeconomics
Prof. Douglas Webber
Class Notes
Economics, micro
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This 7 page Class Notes was uploaded by Shanee Boone on Monday February 15, 2016. The Class Notes belongs to Econ 1002 at Temple University taught by Prof. Douglas Webber in Winter 2016. Since its upload, it has received 13 views. For similar materials see Principles of Economics: Microeconomics in Economcs at Temple University.


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Date Created: 02/15/16
Microeconomics, 3/7/2016  Review of exam results & determination of Exam 1 grading curve   Questions people did the worst on: o Opportunity cost Question: 2 gardners, George & Jack, have  the opportunity to either devote their time to mowing lawns or  cultivating gardens. George Jack Lawns Mowed 10 6 Gardens Cultivated 5 4 Jack has comparative advantage in garden cultivating & George in  lawn mowing. o Hurricane Katrina damaged a large portion of refining and  pipeline capacity when it swept through the gulf coast states in  August ‘05. As a result of this, many gasoline distributors were  not able to maintain normal deliveries. At the pre­hurricane  equilibrium price (i.e. at the initial equilibrium price), we would  expect to see a shortage of gasoline.  o Assume there is a surplus in the market for hybrid automobiles.  This statement is acceptable:  The price of hybrid automobiles will fall in response to the  surplus; as the price falls the quantity demanded  increases and the supply decreases. o In July, market analysts predict that the price of gold will rise in  August. What happens in the gold market in july, holding  everything else constant?  The supply curve shifts to the left o Last month, the T corp. supplied 400 units of 3­ring binders @  $6 per unit. This month, the corp. supplied the same quantity of  binders at $4 per unit. T corp. has experienced:  an increase in supply o Increase in the quantity of apartments demanded is a result  of imposing a rent ceiling. o If demand for Lincoln letters > demand for Booth letters, what  has to be true for the market equilibrium price to make both  letters equal?  Supply of Booth letters would have to be less than the  supply of Lincoln letters.  o What happens in the market for solar panels if the government  offers tax breaks to encourage manufacturers to produce more  solar panels?  Supply increases, Demand does not change, Equilibrium  Price decreases, and Equilibrium quantity increases  o If there are  no externalities, a competitive market achieves  economic efficiency. If there is a negative externality, economic  efficiency will not be achieved because:  too much of the good will be produced  Chapter 6: Elasticity  o Responsiveness to price changes  Up to this point we’ve talked about how the equilibrium  quantity changes as supply & demand shift around  but most of the discussion has centered around which  way quantity will move, rather than how much.  How responsive are you to changes in the price of various goods? (think about it, how would your demand change?  price of gas doubles  ONLY pizza hut pizza prices doubled  ALL pizza prices doubles.   Shoelace prices double.  Economists refer to the responsiveness of the quantity  demanded to a change in the price as the price elasticity  of demand.  It is measured by dividing the percentage change in the  quantity demanded of a product by the percentage  change in the products price   Formula: Price elasticity of demand =  percentage  change in quantity demanded / percentage change  in price  o Price elasticity of Demand o How much (In % terms) does quantity change for a given  (%age) change in price? o Intuition  Big elasticity: small change in price leads to large change  in quantity demanded  SMall elasticity: big change in price leads to a small  change in quantity demanded o What are some examples of goods with large and small  elasticity?  Steep Demand: less elastic; Flat demand: more elastic o Elastic Demand: demand is elastic when the % change in  quantity quantity demanded is greater than the % change in  price, so the price in elasticity is greater than 1 in absolute  value o Inelastic Demand: demand is inelastic when the % change in  quantity demanded is less than the % change in price, so the  price elasticity is less than 1 in absolute power o Unit Elastic Demand:demand is unit elastic when the %  change in quantity demanded is equal to the % change in price, so the price elasticity is equal to 1 in absolute value.  o Elasticity is NOT the same thing as slope.   Slope = calculated using changes in quantity & price  Elasticity = using % changes o Use Midpoint formula to solve for Price elasticity of Demand:  (Q2 ­ Q1) / {Q1 + Q2/2} / (P2 ­P1) / {P1 + P2 /2}   / = divided by  or fraction bar  o Extreme Cases of Elasticity o Perfect elastic demand  horizontal demand curve  elasticity = infinity  any increase in price causes quantity demanded to fall to  0  usually occurs when perfect substitutes exist (e.g. specific brand of paper clips) o Perfectly Inelastic Demand  Vertical Demand Curve   Elastic = 0   People will not change consumption patterns for any price change  e.g. highly addictive drugs o Determinants of the Price Elasticity of Demand o Availability of close substitutes  Availability of substitutes is the most important  determinant of price elasticity of demand because how  consumers react to a change in the price of a product  depends on what alternatives they have.  In general, if a product has more substitutes available, it  will have more elastic demand  If a product has fewer substitutes available, it will have  less elastic demand  Pepsi vs Milk ­ substitutes for milk (soy ,almond, coconut)  are much more different than substitutes for Pepsi ( Coke, generic brands) o Passage of time  Usually takes consumers some time to adjust their buying habits when prices change.   The more time that passes, the more elastic the demand  for a product becomes.  Price of gas triples: over the next few weeks / months  there will not be huge changes in demand because  people still have to get to go about their business (get to  work, etc). But over time, people will buy more fuel  efficient vehicles & take pub. transportation, thus reducing gas consumption o Luxuries vs Necessities  Goods that are luxuries usually have more elastic  demand curves than goods that are necessities  The demand curve for a luxury is more elastic than the  demand curve for a necessity   ALL clothes vs designer clothes  o Definition of the Market  In a narrowly defined market, consumers have more  substitutes available   The more narrowly we define a market, the more elastic  demand will be  Cheerios vs All breakfast cereals  o Share of the good in the consumer’s budget  Goods that take only a small fraction of a consumer’s  budget tend to have less elastic demand than goods that  take a large fraction  In general, the demand for a good will be more elastic the larger the share of the good in the average consumer’s  budget  Shoelaces vs video games  Cereal Price elasticity of demand Post Raisin Brand ­2.5  All Post cereals ­1.8 All family cereals  ­.9 o Price elasticity & Total Revenue o Total revenue ­ total # of funds received by a seller of a good  or service, calculated by multiplying price per unit bu the # of  units sold o Firms are not trying to maximize total revenue, but instead want to maximize profits (revenue minus cost)  When demand is inelastic a cut in price will decrease total revenue   When demand is elastic, a cut in the price will increase  total revenue   Revenue = (Price)(Quantity) o Ex: Demand for gasoline & Total revenue o draw linear demand curve o plot total revenue points o total revenue is maximized at a price of $4 o Price ($) Quantity Demanded Total Revenue ($) 8 0 0 7 2 14 6 4 24 5 6 30 4 8 32 (max. revenue) 3 10 30 2 12 24 1 14 14 0 16 0 o Other Calculations Using Elasticities:  If policymakers know the price elasticity of demand they  can use to predict the outcome of new policies (e.g.  imposing a tax)  Solved problem 6.5 from the text  the gov. is considering imposing a new tax on gas  consumption of $1, which would increase the price of gas  by $.80  If the current price of gasoline is $4, the current quantity  of gasoline demanded is 140 bil. gallons, and the price  elasticity of demand is ­.06, what will the new quantity of  gasoline demanded be after the tax increase ?  ­.06 = % change in quantity demanded / ($4.8 ­ $4) / {$4  + $4.8 / 2}  ­.011 = (Q2 ­ 140 bil) / {140 bil ­ Q2 / 2}  Q2 = 138.5 bil. gallons


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