Econ 1 - Week 2 Notes
Econ 1 - Week 2 Notes Econ 1
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This 2 page Class Notes was uploaded by Elena Stacy on Wednesday July 6, 2016. The Class Notes belongs to Econ 1 at University of California Berkeley taught by Monica Deza in Summer 2016. Since its upload, it has received 57 views. For similar materials see Introduction to Economics in Economcs at University of California Berkeley.
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Date Created: 07/06/16
Lecture 4 Explaining the Law of Demand Substitution effect: when the price of a substitute increases or decreases, the price of the other good becomes relatively higher or lower, resulting in a change in the quantity demanded Income effect: change in quantity consumed resulting from a change in consumer’s purchasing power Giffen good: When price goes up demand also goes up (contrary to the law of demand) because it is such an inferior good that the income effect dominates Elasticity: Eqp = (%change in Q) / (%change in P) In words – ratio of percent change in quantity demanded to percent change in price How to compute Approximation: ((Q2-Q1)/Q1) / ((P2-P1)/P1) = dlnQ/dlnP = dQ/dP * P/Q Midpoint method: %change in Qx = Q2-Q1 / Q1 %change in Qx = Q2-Q1 / ((Q1+Q2)/2) Examples: - Perfectly elastic: Eqp = infinity - Perfectly inelastic: Eqp = 0 - Relatively elastic: Eqp between negative infinity and -1 - Relatively inelastic: Eqp between 0 and 1 - Unit elastic: Eqp = 1 Price increase TR = P x Q E Relatively Elastic P increase x Q decrease (TR (1,0) Eqp = 3 decrease) Relatively Inelastic P increase x Q decrease (TR Eqp = 0.2 increase) Unit Elastic P increase x Q decrease (TR Eqp = 1 same) Perfectly elastic P increase Q decrease (TR is 0) Eqp = infinity Perfectly inelastic P increase Q same (TR increase) Eqp = 0 Price decrease TR = P x Q E Relatively elastic Price decrease Quantity (1,0) Eqp = 3 increase (TR increase) Relatively inelastic Price decrease quantity increase Eqp = 0.2 (TR decrease) Unit Elastic Price decrease quantity increase Eqp = 1 (TR is same) Perfectly elastic Price decrease quantity increase Eqp = infinity (TR is zero) Perfectly inelastic Price decrease quantity stays Eqp = 0 the same (TR decrease) Effects on Price elasticity of demand: - Availability of substitutes - Nature of good: necessity or luxury - Percentage of income that the good requires Less steep curves are more elastic; changes in price effect the quantity demanded/supplied much more