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ECO 012 - 060 Chapter

by: Whitney Davis

ECO 012 - 060 Chapter Eco 060

Whitney Davis
Kutztown University of Pennsylvania

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About this Document

An outline of Chapter 4
Dr. Sraiheen
Class Notes
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This 4 page Class Notes was uploaded by Whitney Davis on Monday February 22, 2016. The Class Notes belongs to Eco 060 at Kutztown University of Pennsylvania taught by Dr. Sraiheen in Winter 2016. Since its upload, it has received 24 views.

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Date Created: 02/22/16
Chapter 4: Elasticity Price Elasticity of Demand  A units-free measure of the responsive of quantity demanded of a good to a change in its price Percentagechange∈quantitydemanded  Price of Elasticity = Percentagechange∈price  Percentages and Proportions o Elasticity is ratio of two percentage changes o Percentage change is a proportionate change  A Units-Free Measure o Percentage change of each variable is independent of units in which variable is measured  Minus Sign and Elasticity o If price of good increases, quantity demanded decreases o Absolute value  Magnitude of price elasticity of demand that says how responsive quantity demanded is  Inelastic and Elastic Demand o Perfectly Inelastic Demand  If quantity demanded remains constant when price changes o Unit Elastic Demand  If percentage change in quantity demanded = percentage change in price  Price elasticity = 1 o Inelastic Demand  Percentage change in quantity demanded < percentage change in price  Elasticity of demand is between 0 and 1  Examples: Food and shelter o Perfectly Elastic Demand  Quantity demanded changes by infinitely large percentage in response to tiny price change  Example: A soft drink from two campus machines located side- by-side o Elastic Demand  Percentage change in quantity demanded exceeds percentage change in price  Price elasticity of demand > 1  Examples: Automobiles and furniture  Factors that Influence the Elasticity of Demand o Elasticity of demand for a good depends on:  Closeness of substitutes  Proportion of income spent on the good  Time elapsed since price change o Closeness of Substitutes  The closer the substitutes for a good, the more elastic demand is for it  A necessity has poor substitutes, so it has inelastic demand  Luxury usually has many substitutes, so it has elastic demand o Proportion of Income  Greater the proportion of income spent on good, more elastic demand is for it  Example: demand for housing is not as inelastic as demand for gum o Time Elapsed Since Price Change  The longer time has elapsed since price change, more elastic demand  Example: demand for oil became more elastic as more time elapsed following huge price hike  Elasticity Along a Linear Demand Curve o Elasticity of demand is not similar to slope o Slope on curve is constant (linear) o At midpoint of linear demand curve, price elasticity of demand = 1 o Price above midpoint, price elasticity of demand > 1  Demand is elastic o Price below midpoint, price elasticity of demand < 1  Demand is inelastic  Total Revenue and Elasticity o Total revenue from sale of good = price of good × quantity sold o Decrease in price does NOT always decrease total revenue o Inelastic Demand  1% price cut increases quantity sold by < 1%  Total revenue decreases o At unit elasticity, total revenue is at maximum o Total revenue test  Method of estimating price elasticity of demand by observing change in total revenue that results from change in price More Elasticities of Demand  Income Elasticity of Demand o A measure of the responsiveness of demand for good/service to a change in income Chane∈QuantityDemanded o Income= Change∈Income  Positive AND > 1 (normal good, elastic income)  Positive AND < 1 (normal good, inelastic income)  Negative (inferior good)  Cross Elasticity if Demand o Measure of the responsiveness of demand for good to a change in price of substitute or complement Change∈QuantityDemandedc o CrossElasticityof Demand= Change∈Priceof Substitute/Complement  If CED is positive, two goods are substitutes  If CED is negative, two goods are complements o Larger cross elasticity (absolute value), greater change in demand and shift in demand curve Elasticity of Supply  Measures responsiveness of quantity supplied to a change in price of good  Calculating Elasticity Change∈QuantitySupplied o Elasticityof Supply=Change∈Price o Elastic and Inelastic Supply  If elasticity of supply > 1, then supply is elastic  If E of supply < 1, then supply is inelastic  If E of supply = 0, then supply is perfectly inelastic  If E of supply = 1, then supply is unit elastic  Factors that Influence Elasticity of Supply o Resource Substitution Possibilities  Goods/services being produced by using unique or rare productive resources  These items have low elasticity of supply  Commonly available resources have high elasticity of supply o Time Frame for the Supply Decision  Momentary supply  when price of good changes, Q supplied is determined my momentary supply of good  Momentary supply is perfectly inelastic because producers cannot change their output  Short-run supply  response of Q to a P change when only some of the possible adjustments to production can be made  Long-run supply  response of Q to P change after all technologically possible ways of adjusting supply have been exploited  Long-run supply is elastic and perfectly elastic


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