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ECON 2020 Exam 2 Lecture 5 Week 6

by: Brianna Notetaker

ECON 2020 Exam 2 Lecture 5 Week 6 Econ 2020

Marketplace > Auburn University > Econ 2020 > ECON 2020 Exam 2 Lecture 5 Week 6
Brianna Notetaker

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These notes cover the rest of elasticity
Principles of Economics: Microeconomics
William M. Finck
Class Notes
Econ, economic, Economics, micro, Microeconomic, Microeconomics
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This 5 page Class Notes was uploaded by Brianna Notetaker on Monday September 19, 2016. The Class Notes belongs to Econ 2020 at Auburn University taught by William M. Finck in Fall 2016. Since its upload, it has received 5 views.


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Date Created: 09/19/16
ECON 2020Exam 2 Lecture 5 D1: 1. Steep 2. Inelastic 3. LittleΔQd 4. Littled D2: 1. Flat 2. Elastic 3. BigΔQd 4. BigE d DeterminantsofPrice ElasticityofDemand 1. Numberof substitutes–numberofsubstitutesandelasticitymove together. 2. Time inWhich to Make the Purchase– time andelasticitymove together. 3. ProportionofIncome – proportionandelasticitymovetogether. 4. Luxuriesvs.Necessities – need andelasticitymoveopposite. TotalRevenueandPrice Elasticity  Totalrevenue– moneyearnedfrom sellinggoods andservices;NOT the same as profit,whichincludescosts; TR = P * Q o If price goes down,the quantitygoesup,whathappenstototal revenue?Thatdependsonelasticity  As P falls,Q rises,so whathappenstoTR?  It dependsonelasticity 2 graph 1– elastic;increase, make totalrevenueincreasebydecreasingtheir price graph 2– inelastic;netchange is a decrease intotalrevenue dueto a price decrease Example:  P1 = $1 Q1 = 150  P2 = $1.25 Q2 = 100  Fine Ed(usingmidpoint)andΔTR (150 − 100 /( 150 + 100 2) 0.4 ????????= (1.25 − 1)/((1.25 + 1)/2) = ⁄0.222 = 1.80  TR1= 1* 150 = $150  TR2= 1.25 * 100 = $125  ΔTR = TR2 – TR1= -$25 SUMMARY:  E > 1: price and TR move OPPOSITE d  Ed< 1: price and TR move TOGETHER  Ed= 1: a price change hasno effect onTR 3 Price ElasticityAlongA LinearDemandCurve Price $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Q 0 1 2 3 4 5 6 7 8 9 10 TR 0 9 16 21 24 25 24 21 16 9 0  As P falls,TR rises:Elastic  As P rises,TR falls:Inelastic  Elasticitydecreasesas quantityincreases At themidpoint:  Ed= 1  TR is maximized Other Types ofElasticities *Do not haveto knowor work theseformulas 1. Price elasticityofsuppls– E = % Δ Qs / % Δ P  WhenS is inelastic,ΔDcauses a bigΔPe 4  WhenS is elastic,ΔD causes a bigΔQe 2. Income elasticityofdemand– E = %Δ Qd /i% Δ Income  E ii positivefor normalgoods  E ii negativefor inferiorgoods 3. Crosselasticityofdemand – E = % Δ Qdxyf X/ % ΔP ofY  E ixyositivefor substitutes  E isnegative for complements xy 5


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