ECON 203 WEEK 4
ECON 203 WEEK 4 Econ 203
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This 4 page Class Notes was uploaded by Isaac Lemus on Thursday September 22, 2016. The Class Notes belongs to Econ 203 at University of Southern California taught by Giri Rahul in Fall 2016. Since its upload, it has received 10 views. For similar materials see Principles of Microeconomics in ECON at University of Southern California.
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Date Created: 09/22/16
Lecture Notes 9/13 ● Continuation from last week: Okay newer situation: let's combine both previous cases! Now we have a shift in both supply and demand. Depending on how strong the effects are you can get two possible answers: ● ● O be careful, As quantity increases in both cases, prices remains ambiguous, it can either decrease or increase. It depends If demand increases more than supply, in which case price rises. ● Take away from this is that one of the key features of a market is prices. Prices can fix surpluses and shortages. Its the equilibrium prices that let economists know how the economy is going and they can make economical decisions for their resources ● CHAPTER 5: APPLICATION OF ELASTICITY. ○ Now it’s time to put everything we’ve learned into real life example, make things quantitative. ○ First of all what is elasticity? Basically it’s how much one variable changes in response to another variable. It can be represented numerically as the responsiveness Qd or Qs has to a particular determinant. ■ Price elasticity of demand (How will quantity demand changes with price) ■ PED= (%change in QD) / (% change in P) ■ If elasticity is greater than one then it is elastic ● Be careful with raising prices because the consumers will be very responsive. ■ If elasticity is less than one then it is inelastic ● The population’s demand for a product is less likely to be affected by a change in price. ● When prices go up the demand goes down but not by much comparatively so the revenue is still positive. The money you earn by raising the process is more than the consumers lost. ■ Elasticity will always be negative so disregard the negative. Look at the magnitude. The larger the number, the larger the elasticity ○ When calculating percentage change use this formula ■ (end value start value) / (start value) x 100% ■ But there is a problem, this standard method gives different answers based off of your starting point ○ ○ From A to B: Price percent of change is 25% Quantity percent of change is 33% therefore 33/25= 1.33 ○ From B to A: Price percent of change is 20% Quantity percent of change is 50% therefore 50/20= 2.50 ○ To counter this issue, we use the Midpoint formula ■ (end valuestart value)/ Midpoint x 100 ■ So just to recap, you use this formula above to find the percent change in price then use this same formula to find the percent change in quantity then do Q/P to find elasticity. Lecture Notes 9/15 ● Now that we’ve covered the mathematical side to elasticity, let's talk about the conceptual side. What are the factors that cause price elasticity? ○ The number of substitutes available correlates to how elastic something is. The more substitutes, the larger the elasticity. ■ EX: Sunscreen vs cereal ● Cereal can be substituted by other breakfast objects, so if the price goes up people will just stop buying it ○ If an item is subcategory of a larger category it will be more elastic, so narrowly defined goods are more elastic ■ Ex: Blue jeans vs clothing ● People don’t need to buy blue jeans, but we need clothes ○ Necessities are less elastic ■ Insulin vs cruises ● People who buy insulin need it, no matter the price. ○ Elasticity is higher in the long run than in the short run ■ Gas prices ● In the moment a person is going to buy gas, but in the long run if prices get too high they can buy a bike, walk, or use public transportation. ● In general, look at the slope of the demand curve. The flatter the curve is the elasticity will be higher. If the curve is steeper than the elasticity is lower. ● In elasticity, as your initial point keep changing, so does your elasticity! Don't get this confused with just slope or opportunity cost, where a straight line means a constant number ● As you go from the top to the bottom of the demand curve, the elasticity decreases, because the more something costs the least of an impact an increase of price is going to make. Here’s how the Slope and Elasticity equations differ: ● Perfect inelastic demand means a vertical line, unit elastic demand is a line with a slope of one and perfect elastic is a horizontal line. ● If you have a very elastic demand curve then an increase in price could bring down the revenue. (PxQ) ● If you have an inelastic demand curve then an increase in price could raise the revenue. (PxQ) ● Now let's look at the supply curve! ○ Price elasticity of supply measures how a change in price affects Qs ■ PES= (% Change in Qs) / (% Change in P ) ○ Again, make sure you use the midpoint formula so that the answer is not swayed by where you are going on the graph. ○ For slope of the curve, if its steep it means its more elastic. The steeper the less elastic something is. ○ Perfectly inelastic means vertical ○ Unitary elastic means a slope of 1 ○ Perfectly elastic mean lateral ● So what causes supply elasticity? ○ How easily a seller can change the quality produced ○ The price elasticity for supply is greater in the longer run than in the short run ● Other types of elasticities ○ Income elasticity of demand ■ This looks at how Qd changes in response to consumer income ■ IED= (%change in Qd) / (% change in income) ■ An increase in income causes the demand for normal good to also increase, therefore: ● Normal goods have an elasticity greater than 0 ● Inferior goods have an elasticity less than 0 ○ Cross price elasticity, looks at how a price change in one good can affect the demand of another good. ■ CRED= (%change in Qd for good 1) / (% change in price of good 2) ■ Substitutes: Elasticity is greater than 1 ● The demand for one product goes up as the cost of another product goes up (Hot dogs and hamburgers) ■ Complements: Elasticity is less than 1 ● The demand for one product goes down as the cost of another product goes up (Motors and cars)
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