Topic 4 Notes
Topic 4 Notes ECON 102
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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