ECON 201 Chapter 5 Part 1 Notes
ECON 201 Chapter 5 Part 1 Notes ECON 2010
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This 3 page Class Notes was uploaded by Kathryn Catton on Thursday February 25, 2016. The Class Notes belongs to ECON 2010 at a university taught by Dr. Zegeye in Winter 2016. Since its upload, it has received 26 views.
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Date Created: 02/25/16
ECON 201 Chapter 5 Part 1 Notes Price Elasticity of Demand- the responsiveness of quantity demanded due to some change in the price of the good/commodity in question. E= % Change in Quantity/% Change in Price E= Change in Q/Q times P/Change in P as you move down the curve from point A to B. Switch Q1 and Q2 along with P1 and P2 to find E moving from point B to A. Moving up the curve you switch. Midpoint Elasticity-= You do the same thing from above moving from point A to B and B to A. They may end up being the same answer for both parts. Absolute value of E > 1, demand is price elastic= %Change of Q > % Change of P. Highly substituted products like coffee and tea or beef and pork. They are like most luxury items. Absolute value of E < 1, demand is price inelastic= %Change of Q < %Change of P. Unresponsive, water price, most necessities. Absolute value of E = 1, demand is of unit elasticity= %Change of Q = %Change of P. Absolute value of E = 0, demand is perfectly inelastic= %Change of Q = 0, %Change of P= 1, Medications Absolute value of E = infinity, demand is perfectly inelastic= %Change of Q (pos/neg), %Change of P= 0 1. Relationships between price, total revenue/expenses and Elasticity. P * Q= total expenditures= TR by producers. Price * Quantity= Total Revenue by producers Price Quantity Total Revenue E 10 * 1 10 - 9 2 18 6.33 8 3 24 3.40 E > 1 7 4 28 2.14 6 5 30 1.44 5 6 30 1 E = 1 4 7 28 0.69 3 8 24 0.47 2 9 18 0.29 E < 1 E > 1, Price Decreases, Total Revenue Increases E > 1, Price Increases, Total Revenue Decreases Demand is PRICE ELASTIC, P and TR go in opposite directions E < 1, Price Decreases, Total Revenue Decreases E < 1, Price Increases, Total Revenue Increases Demand is PRICE INELASTIC, P and TR go in same direction Either way, when E = 1, TR will remain constant What determines the size or magnitude of price elasticity of demand? 1) Availability of substitutes (highly elastic) 2) A necessity or luxury item 3) Length of time that elapses after the price change, before the quantity demanded is measured 4) Long and short run elasticities 5) The percentage of your income devoted to the good. Small %= “the importance of being unimportant” 6) Definition of the market (narrowly or broadly defined. Income Elasticity: almost the same as Price elasticity but you use Income instead of Price. Income elasticity can be either negative or positive. If elasticity of income is positive and greater than 1, it is a luxury good. If income is positive and less than 1, it is a necessity. I
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