Microeconomics Week 4 Notes
Microeconomics Week 4 Notes ECON 2106
Popular in Principles of Microeconomics
verified elite notetaker
Popular in Economics
This 7 page Class Notes was uploaded by Chapman Lindgren on Thursday September 8, 2016. The Class Notes belongs to ECON 2106 at University of Georgia taught by Till Schreiber in Fall 2016. Since its upload, it has received 12 views. For similar materials see Principles of Microeconomics in Economics at University of Georgia.
Reviews for Microeconomics Week 4 Notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 09/08/16
Economics (2106) Notes Week 3 Price Elasticity of Demand W supply decreases, the equilibrium price rises and the equilibrium quantity decreases o But does the price rise by a larger amount and the quantity decrease by a little? The responsiveness of the quantity demanded of a good to a change in its price in terms of the slope of the demand curve Price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same o Calculating elasticity of demand: (percentage change in the quantity demanded) / (percentage change in the price) Example: the price of a pizza is $20.50 and the quantity demanded is 9 pizzas per hour. The price of a pizza falls to $19.50 and the quantity demanded is 11 pizzas per hour $20 average between 2 points, 10 pizzas average between 2 points (change in pizzas = 2 so 2/10 * 100 = 20%) = 20% change in pizzas demanded / 5% change in price = 4 o Price goes up, quantity demanded goes down Average Price and Quantity By using the average price and average quantity, we get the same elasticity value regardless of whether the price rises or falls o Elasticity means it will change easily. If elastic price changes, elastic demand changes drastically A Units-Free Measure: elasticity is a ratio of percentages, so a change in the units of measurement of price or quantity leaves the elasticity value the same Minus Sign Elasticity: the formula yields a negative value, because price and quantity move in opposite directions. But it is the magnitude, or absolute value, that reveals how responsive the quantity change has been to a price change. Economics (2106) Notes Week 3 Inelastic and Elastic Demand Demand can be inelastic, unit elastic, or elastic, and can range from zero to infinity. If the quantity demanded doesn’t change when the price changes, the price elasticity of demand is zero and the good has a perfectly inelastic demand. o A perfectly inelastic demand curve is vertical Unit Elastic Demand: if the percentages change in the quantity demanded equals the percentage change in price. The price elasticity of demand equals 1 and the good has unit elastic demand Economics (2106) Notes Week 3 If the percentage change in the quantity demanded is smaller than the percentage change in price, The price elasticity of demand is less than 1 and the good has inelastic demand If the percentage change in the quantity demanded is greater than the percentage change in price, The price elasticity of demand is greater than 1 and the good has elastic demand If the percentage change in the quantity demanded is infinitely large when the price barely changes The price elasticity of the demand is infinite and the good has a perfectly elastic demand Factors that influence the Elasticity of Demand: The closeness of substitutes o The closer the substitutes for a good or service, the more elastic is the demand for the good or service o Necessities, such as food or housing, generally have inelastic demand o Luxuries, such as exotic vacations, generally have elastic demand The proportion of income spent on the good o The greater the proportion of income consumers spend on a good, the larger is the elasticity of demand for that good The time elapsed since a price change Economics (2106) Notes Week 3 o The more time consumers have to adjust to a price change, or the longer that a good can be stored without losing its value, the more elastic is the demand for that good Total Revenue and Elasticity The total revenue from the sale of a good or service equals the price of the good multiplied by the quantity sold. Revenue is the total sold (price x quantity) When the price changes, total revenue also changes But a rise in price doesn’t always increase total revenue The change in total revenue due to a change in price depends on the elasticity of demand: If demand is elastic, a 1 percent price cut increases the quantity sold by more than 1 percent, and total revenue increase If demand is inelastic, a 1 percent price cut increases the quantity sold by less than 1 percent, and total revenues decrease If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1 percent, and total revenue remains unchanged The total revenue test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change (when all other influences on the quantity sold remain the same). If a price cut increases total revenue, demand is elastic. If a price cut decreases total revenue, demand is inelastic. If a price cut leaves total revenue unchanged, demand is unit elastic. Your Expenditure and Your Elasticity if your demand is elastic, a 1% price cut increase the quantity you buy by more than 1% and your expenditure on the item increases. If your demand is inelastic, a 1% price cut increases the quantity you buy by less than 1 percent and your expenditure on the item decreases. If your demand is unit elastic, a 1% price cut increases the quantity you buy by 1% and your expenditure on the item does not change. Income Elasticity of Demand The income elasticity of demand measures how the quantity demanded of a good respond to a change in income, other things remaining the same. Economics (2106) Notes Week 3 percentagechange∈quantitydemanded percentagechange∈income If the income elasticity of demand is greater than 1, demand is income elastic and the good is a normal good. If the income elasticity of demand is greater than zero but less than 1, demand is income inelastic and the good is a normal good. If the income elasticity of demand is less than zero (negative) the good is an inferior good. Cross Elasticity of Demand The cross elasticity of demand is a measure of the responsiveness of demand for a good to a change in the price of a substitute or a complement, other things remaining the same. The formula for calculating the cross elasticity is: percentagechange∈quantitydemanded percentagechange∈priceof substitute∨compliment The cross elasticity of demand for o A substitute is positive o A compliment is negative Price elasticity of demand = % change quantity demanded / % change in price Economics (2106) Notes Week 3 ∆Q 1 Quantity: Qave = 4.5=22.2 Price: ∆P = 4 =66.7 Pave 3.5 Revenue at Point A = Q * PA = $3.5 = $15 a Revenue at Point B = Q *bPB = $6.4 = $24 Elastic demand: when price changes by 1% and demand changes by more than 1% Elastic price: when the price goes up, customers buy much less Elasticity of Supply When the demand for a good increases, its equilibrium price rises and the equilibrium quantity of the good increases o Does price rise by a large amount and the quantity increases for a little? o Does the price barely rise and the quantity increases by a large amount? This depends on the responsiveness of the quantity supplied of a good to a change in its price Depends on the elasticity of supply of the good Elasticity of Supply measures the responsiveness of the quantity supplied to a change in the price of a good, when all other influences on selling plans remain the same. Calculating the Elasticity of Supply: change∈quantitysupplied change∈price Economics (2106) Notes Week 3 Factors that Influence the Elasticity of Supply: Resource substitution possibilities o The easier it is to substitute among the resources used to produce a good or service, the greater is its elasticity of the supply Time frame for supply decision o The more time that passes after a price change, the greater is the elasticity of supply o Momentary supply is perfectly inelastic. The quantity supplied immediately following a price change is constant o Short run supply is somewhat elastic o Long run supply is the most elastic
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'