Microeconomics, Chapter 4 notes
Microeconomics, Chapter 4 notes Econ 2106
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This 4 page Class Notes was uploaded by Daria Trikolenko on Wednesday September 14, 2016. The Class Notes belongs to Econ 2106 at Georgia State University taught by Carycruz Bueno in Fall 2016. Since its upload, it has received 28 views.
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Date Created: 09/14/16
Chapter 4. Elasticity Responsive demand- a small change in price will likely cause many people to switch from one good to another. Unresponsive consumers- unwilling to change their behavior, even when the price of the good or service changes. Elasticity-the responsiveness of buyers and sellers to change in price or income. Measures how much consumers and producers change their behavior when prices or income changes. Determinants of the price elasticity of demand Price elasticity of demand-measures the responsiveness of quality demanded to a change in price. Elastic Inelastic Quantity demanded changes significantly Quantity demanded changes a small as a result of a price change amount as a result of price change. 1) Existence of Substitutes: When substitutes are plentiful, market forces tilt in favor of the consumer. If there is good substitute than demand is elastic, if there is no substitute- inelastic. 2) The share of the budget spent on the good: The price elasticity of demand is much more elastic for inexpensive items on sale. 3) Necessity VS. Luxury goods: Necessity- is generally thinking about the need, not the price. When the need trumps the price, we expect demand to be relatively inelastic. 4) Time and the Adjustment process: Immediate run- there is no time for consumers to adjust their behavior. Inelastic demand exists whenever price is secondary to the desire to attain a certain amount of the good. (More time->more elastic) The short run-a period of time when consumers can partially adjust their behavior (search for a good deal). Flexibility reduces the demand for expensive gasoline and makes consumer demand more elastic. The long run- period of time when consumers have time to fully adjust to market conditions. As a result of the flexibility that additional time gives the consumers, the demand for goods become more elastic. The price elasticity of demand Formula percentagechange∈thequantitydemanded Price Elasticity for demand=ED= percentagechange∈price Since prices and consumer purchases of goods moves in opposite directions, the sign of the Elasticity is almost always negative. The Midpoint Method Price Quantity demanded $12 20 $6 30 1) Price dropped from 12 to 6 (a drop of 50%). The quantity demanded increases from 20 to 30 (a rise of 50%). ED=50%/-50%= -1 2) Price rises from 6 to 12 (increase of 100%), the quantity demanded falls from 30 to 20 (decrease by 33%) 33 ED= −100 =-0.33 (Q2−Q1 ):(Q(1+Q2):2) ED= P2−P1 ):(P1−P 2 :2) Graphing the price elasticity of demand. When demand is relatively inelastic, the price elasticity of demand must be relatively close to zero. Since there are many substitutes for a good, the demand for a good is relatively elastic. Unitary elasticity- situation in which elasticity in neither elastic nor inelastic. Occurs when the Elasticity is exactly -1, and % change in price equal to % change in quantity demanded. Slope and elasticity Increased time acts to make demand more elastic. Rise from P1to P2-> consumers unable to avoid price increase in immediate run (D1) In short run (D2) consumers more flexible and consumption declines to Q2. In long run (D3), there is reduce consumption. Demand curve continuous to flatten and quantity demanded falls to Q3 in response to higher prices. Price Elasticity of demand and total revenue. Total revenue-is the amount that consumers pay and sellers receive for a good. Total revenue=Price of good* quantity demanded When the price elasticity of demand is elastic, lowering the price will increase total revenue. How do changes in income and the prices of other goods affect elasticity? Inelastic good->raise price-> Increase revenue Elastic good->lower price-> increase revenue The income elasticity of demand (EI) measures how a change in income affects spending. EI= %Change in quantity demanded/ % change in income 1) Normal goods- when higher level of income enable the consumer to purchase more. - Necessities – income elasticity between 0 and 1; - Luxuries – income elasticity of demand greater 1. 2) Inferior goods – choose not to purchase when their income goes up. Have negative income elasticity. Cross-Price Elasticity The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of a related good. %change∈quantitydemanded of onegood Ec= %change∈the priceof arelated good If the goods are substitutes, a price rise in one good will cause the quantity demanded of that good to decline. Demand for substitute good will increase Ec>0. The opposite with compliments. A price increase in one good will make to joint consumption of both goods more expensive. The consumption of both goods will decline Ec<0. No relationship between goods: Ec=0. What is the Price Elasticity of Supply? The price elasticity of supply is a measure of the responsiveness of the quantity supplied to a change in price. When supply is not able to respond to a change in price, we say it is inelastic. When the ability of the supplier to make quick adjustments is limited, the elasticity less than 1. Determines of the price elasticity of supply. The flexibility of products. To maintain flexibility is to have spare production capacity. Extra capacity enables producers to quickly meet changing price conditions, so supply is more responsive or elastic. Time and the adjusting process. In the immediate run, businesses, just like consumers, are quick with what they have on hands. As we move from the immediate run to the short run and price change persist, supply becomes more elastic. %change∈quantitysupplied Es= . change∈the price
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