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by: Daniel Ochs

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# Econ 1- Chapter 5 Notes econ 1

Daniel Ochs
UCLA

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Chapter 5 Notes
COURSE
Principles of Economics
PROF.
Convery
TYPE
Class Notes
PAGES
3
WORDS
CONCEPTS
Econ, Economics
KARMA
25 ?

## Popular in Economcs

This 3 page Class Notes was uploaded by Daniel Ochs on Thursday April 21, 2016. The Class Notes belongs to econ 1 at University of California - Los Angeles taught by Convery in Spring 2016. Since its upload, it has received 7 views. For similar materials see Principles of Economics in Economcs at University of California - Los Angeles.

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Date Created: 04/21/16
Thursday, April 14, 2016 Chapter 5 Elasticity and Its Application - Elasticity: numerical measure of the responsiveness of Qd or Qs to one of its determinate - Elasticity of Demand • Elastic: when an increase in price reduces the quantity demanded a lot • Inelastic: when the same increase in price reduced quantity demanded just a little - Detriments of the Elasticity of Demand • Availability of Substitutes - Price elasticity is higher when close / more substitutes are available • Time Horizon - Price elasticity is higher in the long run than the short run • Category of product (narrow vs broad) - Price elasticity is higher for narrowly deﬁned goods than broadly deﬁned ones • Necessities vs Luxuries - Price elasticity is higher for luxuries than for necessities • Purchase Size - Price elasticity is higher for larger parts of budget - Price Elasticity of Demand (Ed) = (% change in quantity demanded) / (% change in price) • [Ed] < 1 = inelastic P and R move Together • [Ed] > 1 = elastic P and R move Opposite • [Ed] = 1 = unit elastic: P moves but R stays the Same - Percentage Changes Midpoint Method: [(end value - start value) / (midpoint)] x 100% • 1 Thursday, April 14, 2016 • Price elasticity = % change of P / % change of Q - Variety of Demand curves • ﬂatter curve (smaller slope) = bigger elasticity • steeper curve (larger slope) = smaller elasticity • slope of a linear demand curve is constant, but its elasticity is not - Total Revenue (R) = Price (P) x Quantity (Q) - Elasticity of Supply • Elastic: when an increase in price reduces the quantity supplied a lot • Inelastic: when the same increase in price increases quantity supplied just a little - Detriments of the Elasticity of Supply • Change in Per-Unit Costs with Increased Production - More elastic when easy to produce at constant unit cost - More elastic when manufactured goods • Time Horizon - More elastic in long run • Share of Market for Inputs - More elastic in small share of market for inputs • Geographic Scope - More elastic when supplying locally - Price Elasticity using Midpoint Formula - Income elasticity of demand = % change in Qd / % change in income - Cross-Price elasticity of Demand = % change in Qd for good 1 / % change in price of good 2 - Summary • Elasticity measures the responsiveness of QD or QS to one of its determinants. 2 Thursday, April 14, 2016 • Price elasticity of demand equals percentage change in QD divided by percentage change in P. - When it’s less than one, demand is “inelastic.” - When greater than one, demand is “elastic.” • When demand is inelastic, total revenue rises when price rises. When demand is elastic, total revenue falls when price rises. • Demand is less elastic in the short run, for necessities, for broadly deﬁned goods, and for goods with few close substitutes. • Price elasticity of supply equals percentage change in QS divided by percentage change in P. - When it’s less than one, supply is “inelastic.” - When greater than one, supply is “elastic.” • Price elasticity of supply is greater in the long run than in the short run. • The income elasticity of demand measures how much quantity demanded responds to changes in buyers’ incomes. • The cross-price elasticity of demand measures how much demand for one good responds to changes in the price of another good. 3

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