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Topic 4 Notes

by: John Om

Topic 4 Notes ECON 102

John Om
Penn State
GPA 3.0

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First set of notes from topic 4, week of FEB 15-19
Introductory Microeconomic Analysis and Policy
Wayne Geerling
Class Notes
25 ?




Popular in Introductory Microeconomic Analysis and Policy

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This 8 page Class Notes was uploaded by John Om on Sunday February 21, 2016. The Class Notes belongs to ECON 102 at Pennsylvania State University taught by Wayne Geerling in Winter 2016. Since its upload, it has received 16 views. For similar materials see Introductory Microeconomic Analysis and Policy in Economcs at Pennsylvania State University.


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Date Created: 02/21/16
Topic 4: Price Elasticity of Demand ­ Elasticity o Responsiveness of buyers and sellers to changes in market conditions o Think responsiveness when you see the word elasticity ­ Demand is elastic if: o Quantity demanded (consumption) changes significantly as the result of the price change ­ Demand is inelastic if: o Quantity demanded (consumption) changes a small amount as the result of the price  change Real World Examples:  1. Gas 4. Cereal 2. 5. ­ Elastic or inelastic? ­ Elastic or inelastic? ­ A specific brand of gas ­ Imperfect substitutes – demand  ­ Perfect substitutes exist somewhat elastic ­ Specific brand of cereal: Special K 3. ­ More substitutes, demand more elastic 6. 7. Determinants of the Price Elasticity of Demand 1. Existence of substitutes: o More substitutes makes it easier to change your consumption habits 2. Share of the budget spent on the good: o How would your consumption change if price increased by 80%? 3. Necessity vs Luxury o You respond more to a price change for a luxury than for life saving medicine 4. Time and Adjustment Process o Demand becomes more elastic over time 8. Time Periods of Market Response 9. Time, Period, Name 10. How Long? 11. Demand 12. Immediate Run 13. No time to adjust  14. Very inelastic or  behavior perfectly inelastic 15. Short Run 16. A little bit of time to  17. Slightly more elastic  adjust behavior than the immediate run 18. Long Run 19. Enough time to make a  20. Even more elastic.  full adjustment to any  Demand elasticity  changed in price reflects the information  of all substitutes 21. 22. 23. 24. 25. P1 = level of demand 26. Q 1D 1 level of quantity demanded 27. As the line moves along, price goes up and demand goes down, vice versa 28.  29 .   In class exercise 1. Lebron James autograph – INELASTIC 2. A Broadway ticket – INELASTIC 3. Surgery to remove cancer – INELASTIC 4. A Kawasaki Jet Ski – ELASTIC 5. A slice of Canyon pizza – ELASTIC 6. A can of vegetables – ELASTIC 7. A Bud Light 30 pack – INELASTIC 8. Electric to power your home – INELASTIC 30. ­ Addictive things are INELASTIC 31. Computing the Price Elasticity of Demand ­ Elasticity can help answer questions such as: o How should a firm set prices? o How much revenue will an excise tax generate? 32. ­ E d  %  ∆ d   ∆ = change 33.   %∆P 34. Example ­ University parking pass price increase by 70% ­ As a result, 10% less people demand a parking pass o Plug in equation  ­10%/­70% = ­0.143 35. 36. 37. 38. 39. 40. 41. 42. Computing Price Elasticity of Demand 43. Coefficient 44. Elasticity 45. Interpretation 46. Example 47. E  = 0 48. Perfectly  49. Price does not  50. Life­saving  d inelastic matter medication 51. E d< 1 52. Relatively  53. Price is less  54. Gasoline inelastic important than  the quantity  purchased 55. E d= 1 56. Unitary elastic 57. Price and  58. quantity are  equally  important 59. E d> 1 60. Relatively  61. Price is more  62. An orange elastic important than  the quantity  purchased 63. E d> ∞ 64. Perfectly  65. Price is  66. $100 Bill elastic everything 67. 68. _ ABSOLUTE VALUE MATTERS _ 69. Slope and Elasticity ­ Elasticity and the slope of the demand curve are NOT the same ­ In fact, with a linear demand curve: o The slope will be the same at all points o Elasticity will be different at all points o Elasticity decreases (gets more inelastic) as we move down and right along a linear  demand 70. 71. Elasticity and Total Revenue ­ Total revenue (TR) = P x Q ­ P & Q move in opposite directions ­ For elastic goods, decrease price would increase TR ­ For inelastic goods, increase price would increase TR ­ Think of which side moves more 72. 73. 74. 75. 76. 77. 78. 79. Relationship between Price Elasticity of Demand and Total Revenues ­ Inelastic: Ed < 1 o P decreases, TR decreases and vice versa ­ Unit Elastic: Ed = 1 o P decreases, TR no change and vice versa ­ Elastic: Ed > 1 o P decreases, TR increases and vice versa 80.


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