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Eco 110: Week 4

by: Frankie Bjork

Eco 110: Week 4 ECO 110

Frankie Bjork
UW - L

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About this Document

These are all the notes on chapter five (which will be on our first exam) and some of the notes on chapter six.
Microeco & Pub Pol
Amena Khandker
Class Notes
Eco 110, Economics, Microeconomics
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This 3 page Class Notes was uploaded by Frankie Bjork on Friday February 19, 2016. The Class Notes belongs to ECO 110 at University of Wisconsin - La Crosse taught by Amena Khandker in Spring 2016. Since its upload, it has received 9 views. For similar materials see Microeco & Pub Pol in Economcs at University of Wisconsin - La Crosse.


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Date Created: 02/19/16
Eco 110: 2/16-2/18 Chapter Five Elasticity and Its Application  Elasticity measures consumers’ response to a price change. It is defined as: PercentageChange∈QuantityDemanded ∆Q D E= PercentageChange∈Price = ∆ P H= higher number (Q2−Q 1 (QH−Q L L= lower (Q +Q )/(P2−P 1 (Q +Q ) /(H −PL) 2 1 H L Arc Elasticity: 2 OR 2 EARC (P2+P1) (PH+P L 2 2 Total Revenue: Price x Quantity Example: Price/bushe Quantity Arc Elasticity Total l ($) Demanded Revenue ($) 5 10 N/A 50 4 20 3.00 80 3 35 1.909 105 2 55 1.0989 110 1.6 68.75 1.00 110 1 80 .33 80 E > Elastic demand %∆ QD > %∆P 1 E = Unit elastic demand %∆ QD = %∆P 1 E < Inelastic demand Q %∆ D < %∆P 1 E = Perfectly elastic Horizontal demand curve ∞ demand E = Perfectly inelastic Vertical demand curve 0 demand IF DEMAND IS Elastic (E > 1) P and TR are inversely related Inelastic (E < 1) P and TR are positively related Unitary Elastic (E = 1) P change has no effect on TR Determinant of Price Elasticity: 1. Substitutability: Larger the no. of good substitutes available, greater is E 2. Proportion of Income: Larger a good bulks in one’s budget, greater is E 3. Necessities (Luxuries): necessities (luxuries) tend to have inelastic (elastic) demand 4. Time: Demand tends to be more elastic as time period increases Applications  Wage bargaining: UAW argued that wages can be increased by lowering automobile price, since E = 4. However, E is in .5 to 1.5 range.  Bumper crop: Since E is .2 to .25, a bumper crop reduces price and TR.  Excise Tax: Govt. imposes excise tax on inelastic commodities. Cross Elasticity Measures: 1. Income elasticity of Demand (Ey) Percentagechange∈quantitydemanded a. Percentagechange∈income b. Positive for normal goods and negative for inferior goods 2. Cross-Elasticity of Demand (Ec) Percentagechange∈quantitydemanded of onegood a. Percentagechange∈priceof another good b. Positive for substitute and negative for complements 3. Price Elasticity of Supply (Es) Percentagechange∈quantitydemanded a. Percentagechange∈price Chapter Six Supply, Demand, and Government Policies  Control on Prices: o Price Ceiling: upper limit imposed on price  Rent control created housing shortage in New York  Gasoline price control necessities rationing of gasoline o Price Floor (support): lower limit imposed on price  Under milk price support program, government buys and stores surplus milk products  Minimum wage creates unemployment in the unskilled labor market o Tax Incidence: burden of tax to be shared by the market participants  Taxes on buyers  Taxed on sellers  Elasticity and tax incidence: o Share of tax ultimately paid by consumers and sellers


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