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Econ Chapter 5 Reading Notes

by: Samantha Shea

Econ Chapter 5 Reading Notes ECON 201

Marketplace > Michigan State University > Microeconomics > ECON 201 > Econ Chapter 5 Reading Notes
Samantha Shea

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About this Document

These are notes taken while reading chapter 5 of the Principles of Microeconomics book.
Micro Economics
Professor Liedholm
Class Notes
Microeconomic, Reading, notes
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This 3 page Class Notes was uploaded by Samantha Shea on Sunday September 18, 2016. The Class Notes belongs to ECON 201 at Michigan State University taught by Professor Liedholm in Fall 2016. Since its upload, it has received 6 views. For similar materials see Micro Economics in Microeconomics at Michigan State University.

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Date Created: 09/18/16
Chapter  5  Reading  Notes Sunday,  September   18,  204:18  PM Elasticity  and  Its  Application ○ Elasticity  is  a  measure  of  how    much  buyers  and  sellers  respond  to  changes  in   market  conditions ► The  Elasticity  of  Demand Elasticity:  a  measure  of  the  responsiveness  of  quantity  demanded  or  quantity   ○ supplied  to  a  change  in  one  of  its  determinants • The  price  of  elasticity  and  it's  determinants ○ Price  elasticity  of  demand :  a  measure  of  how  much  the  quantity   demanded  of  a  good  responds  to  a  change  in  the  price  of  that  good,   computed  as  the  percentage  change  in  quantity  demanded  divided  by  the   percentage  change  in  price ○ What  influences  the  price  elasticity  of  demand? § Availability  of  close  substitutes □ Goods  with  close  substitutes  =  more  elastic  demand § Necessities  versus  luxuries □ Necessities  =  inelastic  demands □ Luxuries  =  elastic  demands § Definition  of  the  market □ Narrowly  defined  markets  =  more  elastic  demand  than   broadly  defined  markets § Time  horizon □ More  elastic  demand  over  longer  time  horizons • Computing  the  Price  of  Elasticity  of  Demand ○ Price  elasticity  of  demand  =  %  change  in  quantity  demanded/  %  change  in   price ○ A  larger  price  elasticity  implies  a  greater  responsiveness  of  quantity   demanded  to  changes  in  price • The  Midpoint  Method ○ Midpoint  method  computes  a  percentage  change  by  dividing  the  change   by  the  midpoint  (average)  of  the  initial  and  final  levels ○ Used  when  calculating  the  price  elasticity  of  demand  between  two  points ○ For  calculating  the  price  elasticity  of  demand  between  two  points   denoted  (Q1,  P1)  and  (Q2,P2): § Price  elasticity  of  demand= (Q2  -­‐Q1)  /  [(Q2  +  Q1)  /  2] ○ Midpoint  method  computes  a  percentage  change  by  dividing  the  change   by  the  midpoint  (average)  of  the  initial  and  final  levels ○ Used  when  calculating  the  price  elasticity  of  demand  between  two  points ○ For  calculating  the  price  elasticity  of  demand  between  two  points   denoted  (Q1,  P1)  and  (Q2,P2): § Price  elasticity  of  demand= (Q2  -­‐Q1)  /  [(Q2  +  Q1)  /  2]            (P2  -­‐P1)  /  [(P2  +  P1)  /  2] -­ Numerator:  %  change  in  quantity  computed  using  the   midpoint  method -­ Denominator:  %  change  in  price  computed  using  the  midpoint   method • The  Variety  of  Demand  Curves ○ Demand  is  elasticwhen  the  elasticity  is  greater  than  1 ○ Demand  is  inelasticwhen  elasticity  is  less  than  1 ○ When  elasticity  is  exactly  1,  ds  it  elasticity ○ The  flatter  the  demand  curve  that  passes  through  a  given  point,  the   greater  the  price  elasticity  of  demand ○ The  steeper  the  demand  curve,  the  smaller  the  price  elasticity  of  demand ○ Demand  isperfectly  inelastic when  there  is  zero  elasticity  and  demand   curve  is  vertical Demand  is  perfectly  elastic ,  when  demand  curve  becomes  horizontal ○ • Total  Revenue  and  the  Price  Elasticity  of  Demand ○ Total  revenu-­‐ the  amount  paid  by  buyers  and  received  by  sellers  of  a   good,  computed  as  the  price  of  the  good  ties  the  quantity  sold § P  x  Q ○ Demand  is  inelastic  then  an  increase  in  the  price  causes  and  increase  in   total  revenue ○ Demand  is  elastic:  an  increase  in  the  price  causes  a  decrease  in  total   revenue ○ General  rules § Demand  =  inelastic  (a  price  elasticity  less  than  1),  price  and  total   revenue  move  in  the  same  direction § Demand  =  elastic  (a  price  elasticity  greater  than  1),  price  and  total   revenue  move  in  opposite  directions § Demand  =  unit  elastic  (a  price  elasticity  =  1),  total  revenue  remains   constant  when  the  price  changes • Elasticity  and  Total  Revenue  along  a  Linear  Demand  Curve ○ Slope  of  a  linear  demand  curve  is  constant,  the  elasticity  is  not ○ Elasticity  is  the  ratio  of  percentage  changes  in  the  two  variables ○ Linear  demand  curve  illustrates  that  the  price  elasticity  of  demand  doesn't   need  to  be  the  same  at  all  points  on  a  demand  curve • Other  Demand  Elasticities ○ The  income  elasticity  of    a  measure  of  how  much  the  quantity   demanded  of  a  good  responds  to  a  change  in  consumers'  income ○ Elasticity  is  the  ratio  of  percentage  changes  in  the  two  variables ○ Linear  demand  curve  illustrates  that  the  price  elasticity  of  demand  doesn't   need  to  be  the  same  at  all  points  on  a  demand  curve • Other  Demand  Elasticities The  income  elasticity  of    a  measure  of  how  much  the  quantity   ○ demanded  of  a  good  responds  to  a  change  in  consumers'  income § Income  elasticity  of  demand= %  change  in  quantity  demanded                %  change  in  income   § Normal  goods  have  positive  income  elasticities § Inferior  goods  have  negative  income  elasticities § Necessities  tend  to  have  small  income  elasticities § Luxuries  tend  to  have  large  income  elasticities   ○ The  cross-­‐price  elasticity  of  demand:  a  measure  of  how  much  the  quantity   demanded  of  one  good  responds  to  a  change  in  the  price  of  another  good ▪ Cross-­‐price  elasticity  of  demand=%  change  in  quantity  demanded  of  good   1 %  change  in  the  price  of  good  2 ▪ Substitutes:  cross-­‐price  elasticity  is  positive ▪ Complements:  cross-­‐price  elasticity  is  negative ► The  Elasticity  of  Supply • The  price  Elasticity  of  Supply  and  Its  Determinants ○ Price  elasticity  of  supply:   a  measure  of  how  much  the  quantity  supplied  of   a  good  responds  to  a  change  in  the  price  of  that  good ○ Depends  on  flexibility  of  sellers  to  change  the  amount  of  the  good  they   produce ○ Key  determinant  of  the  price  elasticity  of  supply  is  the  time  period  being   considered ○ Supply  is  usually  more  elastic  in  the  long  run • Computing  the  Price  Elasticity  of  Supply ○ Price  elasticity  of  supply  =   %  change  in  quantity  supplied      change  in  price  % • The  Variety  of  Supply  Curves ○ Zero  elasticity:  perfectly  inelastic,  supply  curve  is  vertical ○ Perfectly  inelastic:  price  elasticity  of  supply  approaches  infinity  and  the   supply  curve  becomes  horizontal   ○ Low  levels  of  quantity  supplied,  the  elasticity  of  supply  is  high  indicating   firms  respond  substantially  to  changes  in  the  price ► Three  Applications  of  Supply,  Demand,  and  Elasticity • Tools  of  supply  and  demand  can  be  applied  to  many  markets ○ For  example:  market  for  wheat,  market  for  oil,  and  the  market  for  illegal   drugs


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