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This 0 page Class Notes was uploaded by John Om on Thursday February 25, 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 17 views. For similar materials see Introductory Microeconomic Analysis and Policy in Economcs at Pennsylvania State University.
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Date Created: 02/25/16
Topic 4 Price Elasticity of Demand Elasticity 0 Responsiveness of buyers and sellers to changes in market conditions 0 Think responsiveness when you see the word elasticity Demand is elastic if 0 Quantity demanded consumption changes significantly as the result of the price change Demand is inelastic if 0 Quantity demanded consumption changes a small amount as the result of the price change Real World Examples 1 Gas 4 Cereal 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 339 More substitutes demand more elastic 7 Determinants of the Price Elasticity of Demand 1 Existence of substitutes 0 More substitutes makes it easier to change your consumption habits 2 Share of the budget spent on the good 0 How would your consumption change if price increased by 80 3 Necessity vs Luxury 0 You respond more to a price change for a luxury than for life saving medicine 4 Time and Adjustment Process 0 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 re ects the information of all substitutes 21 22 23 24 25 P1 level of demand 26 Q1D1 level of quantity demanded 27 As the line moves along price goes up and demand goes down vice versa 28 29 WNQ V PP N o O U p K 32 34 7 want a 7 3 Time ElaStiEleiljaili mgil Prise Quantity In class exercise Lebron James autograph INELASTIC A Broadway ticket INELASTIC Surgery to remove cancer INELASTIC A Kawasaki Jet Ski ELASTIC A slice of Canyon pizza ELASTIC A can of vegetables ELASTIC A Bud Light 30 pack INELASTIC Electric to power your home INELASTIC Addictive things are INELASTIC Computing the Price Elasticity of Demand Elasticity can help answer questions such as 0 How should a firm set prices 0 How much revenue will an excise tax generate Ed 33 AP Example A change University parking pass price increase by 70 As a result 10 less people demand a parking pass 0 Plug in equation I lO 70 0l43 40 41 42 Computing Price Elasticity of Demand 43 Coefficient 44 Elasticity 45 Interpretation 46 Example 47 Ed 0 48 Perfectly 49 Price does not 50 Lifesaving inelastic matter medication 51 Ed lt 1 52 Relatively 53 Price is less 54 Gasoline inelastic important than the quantity purchased 55 Ed 1 56 Unitary elastic 57 Price and 58 quantity are equally important 59 Ed gt 1 60 Relatively 61 Price is more 62 An orange elastic important than the quantity purchased 63 Ed gt oo 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 0 The slope will be the same at all points 0 Elasticity will be different at all points 0 Elasticity decreases gets more inelastic as we move down and right along a linear demand 70 7l Elasticity and Total Revenue Total revenue TR P x Q P amp 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 80 81 Relationship betwee Inelastic Ed lt 1 Total Revenue Tradeoff when Demand is Elastic 51 Elastic li HlJHil El 39l lll39liy 1 Hit Malawi H39U39HHI39 hm KL Hamil I quot 539 1 U l u n v M Q Q Hi If P 130 U Q 6 and revenue 1080 1 When Demand is UMSUC a price Increase leads to a all in revenue otal Revenue Tradeoff when Demand is Unitary 52 mCreagQg 3 EVEQUE Um 10 n h5w a 1i 1 c r 39 v I quotA i If P 515039 3 20 J 6 and X evenue 900 gig BIN d9m nd elasticny 1 IS unit lastic a price increase U m E aads to no change in avenue W M r 397 l E i wtlL Gem we elasticity 40316 p IfP31eo w 351 Q 13 and revenue 2080 iWhen Demand IS inelastic a price increase causes revenue to rise Total Revenue Tradeoff when Demand is Inelastic 552 1 0 P decreases R decreases and Vice versa Unit Elastic Ed l 0 P decreases TR no change and Vice versa Elastic Ed gt 1 0 P decreases TR increases and Vice versa Price Elasticity of Supply Price Elasticity of Supply Determinants Flexibility of Producers 0 Have extra capacity 0 Maintain inventory 0 Relocate easily 82 2 Time and adjustment Immediate Run Price Elasticity of Supply responsiveness of the quantity supplied to a change in price A firm will have more production exibility if it is able to 0 Suppliers are stuck with What they have on hand No adjustments Short Run V Long Run 0 Supply becomes more elastic over time 83 Price Elasticity of Supply Price Elasticity of Supply Mathematically 0 Change in quantity supplied as a result of a change in price 0 Es Ml 84 AP 0 Will this ratio be positive or negative Why I Positive Law of Supply 85 Supply Elastacsty Examples 53quot 39 F l J mmw W W n k w r r m Efaz titiiy mtu rm at gun L Perfectly r r 0 CTRant39ou inelastic L if quot iarxd Relatively Cell ohone t lt E i 39 Inelastic 39 tower Relatively E A gt 1 Hot dog H elasuc vendor 86 87 Income Elasticity Income Elasticity of demand measures the responses of Qd to a change in consumer income 0 E1 Agg 88 AI How does QD change in response to a change in income Inferior good E lt 0 Normal good necessity 0 lt E1lt 1 Normal good luxury E1gt l 89 CrossPrice Elasticity Measures the responsiveness of the quantity demanded of one good to a change in the price of another good 0 E AQdA 90 APB 92 Determinants of Elasticity l 2 3 4 Availability of substitutes Necessity vs Luxury Share of the budget spent on goods Time and adjustments
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