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by: Roger D.

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# Microeconomics 201 ~ Chapter 6 201

Marketplace > University of North Dakota > Microeconomics > 201 > Microeconomics 201 Chapter 6
Roger D.
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This pdf covers my class notes and chapter 6...
COURSE
Principles of Microeconomics
PROF.
Dr. Xiao Wang
TYPE
Class Notes
PAGES
11
WORDS
CONCEPTS
University of North Dakota, Econ, Economics, Principles, class, notes, Lecture Notes, paul, krugman, Robin, wells, xiao, wang
KARMA
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This 11 page Class Notes was uploaded by Roger D. on Saturday September 10, 2016. The Class Notes belongs to 201 at University of North Dakota taught by Dr. Xiao Wang in Fall 2016. Since its upload, it has received 8 views. For similar materials see Principles of Microeconomics in Microeconomics at University of North Dakota.

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Date Created: 09/10/16
ECON 201 ~ CHAPTER 6 ~ ELASTICITY The price elasticity of demand is the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve. and The midpoint method is a technique for calculating the percent change. In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values. The midpoint method replaces the usual definition of the percent change in a variable, X, with a slightly different definition: where the average value of X is defined as The price elasticity of demand is equal to the percent change in the quantity demanded divided by the percent change in the price as you move along the demand curve, and dropping any minus sign. In practice, percent changes are best measured using the midpoint method, in which the percent changes are calculated using the average of starting and final values. Demand is perfectly inelastic when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line. Demand is perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line. Demand is elastic if the price elasticity of demand is greater than 1, inelastic if the price elasticity of demand is less than 1, and unit-elastic if the price elasticity of demand is exactly 1. The total revenue is the total value of sales of a good or service. It is equal to the price multiplied by the quantity sold.  When demand is unit-elastic, the two effects exactly balance; so a fall in price has no effect on total revenue.  When demand is inelastic, the quantity effect is dominated by the price effect; so a fall in price reduces total revenue.  When demand is elastic, the quantity effect dominates the price effect; so a fall in price increases total revenue. Except in the rare case of a good with perfectly elastic or perfectly inelastic demand, when a seller raises the price of a good, two countervailing effects are present:  A price effect: After a price increase, each unit sold sells at a higher price, which tends to raise revenue.  A quantity effect: After a price increase, fewer units are sold, which tends to lower revenue. The price elasticity of demand tells us what happens to total revenue when price changes: its size determines which effect—the price effect or the quantity effect— is stronger. Specifically:  If demand for a good is unit-elastic (the price elasticity of demand is 1), an increase in price does not change total revenue. In this case, the quantity effect and the price effect exactly offset each other.  If demand for a good is inelastic (the price elasticity of demand is less than 1), a higher price increases total revenue. In this case, the quantity effect is weaker than the price effect.  If demand for a good is elastic (the price elasticity of demand is greater than 1), an increase in price reduces total revenue. In this case, the quantity effect is stronger than the price effect.  When demand is unit-elastic, the two effects exactly balance; so a fall in price has no effect on total revenue.  When demand is inelastic, the quantity effect is dominated by the price effect; so a fall in price reduces total revenue.  When demand is elastic, the quantity effect dominates the price effect; so a fall in price increases total revenue.  Demand is perfectly inelastic if it is completely unresponsive to price. It is perfectly elastic if it is infinitely responsive to price.  Demand is elastic if the price elasticity of demand is greater than 1. It is inelastic if the price elasticity of demand is less than 1. It is unit-elastic if the price elasticity of demand is exactly 1.  When demand is elastic, the quantity effect of a price increase dominates the price effect and total revenue falls. When demand is inelastic, the quantity effect is dominated by the price effect and total revenue rises.  Because the price elasticity of demand can change along the demand curve, economists refer to a particular point on the demand curve when speaking of “the” price elasticity of demand.  Ready availability of close substitutes makes demand for a good more elastic, as does a longer length of time elapsed since the price change. Demand for a necessity is less elastic, and demand for a luxury good is more elastic. Demand tends to be inelastic for goods that absorb a small share of a consumer’s income and elastic for goods that absorb a large share of income. The cross-price elasticity of demand between two goods measures the effect of the change in one good’s price on the quantity demanded of the other good. It is equal to the percent change in the quantity demanded of one good divided by the percent change in the other good’s price. The income elasticity of demand is the percent change in the quantity of a good demanded when a consumer’s income changes divided by the percent change in the consumer’s income. The demand for a good is income-elastic if the income elasticity of demand for that good is greater than 1. The demand for a good is income-inelastic if the income elasticity of demand for that good is positive but less than 1.  Goods are substitutes when the cross-price elasticity of demand is positive. Goods are complements when the cross-price elasticity of demand is negative.  Inferior goods have a negative income elasticity of demand. Most goods are normal goods, which have a positive income elasticity of demand.  Normal goods may be either income-elastic, with an income elasticity of demand greater than 1, or income-inelastic, with an income elasticity of demand that is positive but less than 1. The price elasticity of supply is a measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve. There is perfectly inelastic supply when the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied. A perfectly inelastic supply curve is a vertical line. There is perfectly elastic supply when even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite. A perfectly elastic supply curve is a horizontal line.  The price elasticity of supply is the percent change in the quantity supplied divided by the percent change in the price.  Under perfectly inelastic supply, the quantity supplied is completely unresponsive to price and the supply curve is a vertical line. Under perfectly elastic supply, the supply curve is horizontal at some specific price. If the price falls below that level, the quantity supplied is zero. If the price rises above that level, the quantity supplied is extremely large.  The price elasticity of supply depends on the availability of inputs, the ease of shifting inputs into and out of alternative uses, and the period of time that has elapsed since the price change. 1. Many economic questions depend on the size of consumer or producer responses to changes in prices or other variables. Elasticity is a general measure of responsiveness that can be used to answer such questions. 2. The price elasticity of demand—the percent change in the quantity demanded divided by the percent change in the price (dropping the minus sign)—is a measure of the responsiveness of the quantity demanded to changes in the price. In practical calculations, it is usually best to use the midpoint method, which calculates percent changes in prices and quantities based on the average of starting and final values. 3. The responsiveness of the quantity demanded to price can range from perfectly inelastic demand, where the quantity demanded is unaffected by the price, to perfectly elastic demand, where there is a unique price at which consumers will buy as much or as little as they are offered. When demand is perfectly inelastic, the demand curve is a vertical line; when it is perfectly elastic, the demand curve is a horizontal line. 4. The price elasticity of demand is classified according to whether it is more or less than 1. If it is greater than 1, demand is elastic; if it is less than 1, demand is inelastic; if it is exactly 1, demand is unit-elastic. This classification determines how total revenue, the total value of sales, changes when the price changes. If demand is elastic, total revenue falls when the price increases and rises when the price decreases. If demand is inelastic, total revenue rises when the price increases and falls when the price decreases. If demand is unit-elastic, total revenue is unchanged by a change in price. 5. The price elasticity of demand depends on whether there are close substitutes for the good in question, whether the good is a necessity or a luxury, the share of income spent on the good, and the length of time that has elapsed since the price change. 6. The cross-price elasticity of demand measures the effect of a change in one good’s price on the quantity demanded of another good. The cross-price elasticity of demand can be positive, in which case the goods are substitutes, or negative, in which case they are complements. 7. The income elasticity of demand is the percent change in the quantity of a good demanded when a consumer’s income changes divided by the percent change in income. The income elasticity of demand indicates how intensely the demand for a good responds to changes in income. It can be negative; in that case the good is an inferior good. Goods with positive income elasticities of demand are normal goods. If the income elasticity is greater than 1, a good is income-elastic; if it is positive and less than 1, the good is income-inelastic. 8. The price elasticity of supply is the percent change in the quantity of a good supplied divided by the percent change in the price. If the quantity supplied does not change at all, we have an instance of perfectly inelastic supply; the supply curve is a vertical line. If the quantity supplied is zero below some price but infinite above that price, we have an instance of perfectly elastic supply; the supply curve is a horizontal line. 9. The price elasticity of supply depends on the availability of resources to expand production and on time. It is higher when inputs are available at relatively low cost and the longer the time elapsed since the price change. Correct Matches: ➜ Price elasticity ratio of the percent change in the quantity demanded to the of demand percent change in the price as we move along the demand curve. ➜ a technique for calculating the percent change in which changes in Midpoint a variable are compared with the average, or midpoint, of the method starting and final values. ➜ Perfectly the case in which the quantity demanded does not respond at all to inelastic changes in the price; the demand curve is a vertical line. demand ➜ Perfectly the case in which any price increase will cause the quantity demanded to drop to zero; the demand curve is a horizontal line. elastic demand ➜ Elastic the case in which the price elasticity of demand is greater than 1. demand ➜ Inelastic the case in which the price elasticity of demand is less than 1. demand ➜ Unit-elasticthe case in which the price elasticity of demand is exactly 1. demand ➜ the total value of sales of a good or service (the price of the good Total revenuer service multiplied by the quantity sold). ➜ a measure of the effect of the change in the price of one good on Cross-price the quantity demanded of the other; it is equal to the percent elasticity ofhange in the quantity demanded of one good divided by the percent change in the price of another good. demand ➜ the percent change in the quantity of a good demanded when a Income consumer’s income changes divided by the percent change in the elasticity oconsumer’s income. demand ➜ Income-elastice case in which the income elasticity of demand for a good is demand greater than 1. ➜ the case in which the income elasticity of demand for a good is Income- inelastic positive but less than 1. demand ➜ a measure of the responsiveness of the quantity of a good supplied to the price of that good; the ratio of the percent change in the Price elastiquantity supplied to the percent change in the price as we move of supply along the supply curve. ➜ Perfectly the case in which the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity inelastic supplied; the perfectly inelastic supply curve is a vertical line. supply ➜ the case in which even a tiny increase or reduction in the price will Perfectly lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite; the perfectly elastic supply elastic supplycurve is a horizontal line.

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