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ECON 2020 (Dr. Macy Finck) September 19-23

by: Gabrielle Ingros

ECON 2020 (Dr. Macy Finck) September 19-23 Econ 2020

Marketplace > Auburn University > Economics > Econ 2020 > ECON 2020 Dr Macy Finck September 19 23
Gabrielle Ingros
GPA 3.8

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These are the notes from the lectures given in class.
Principles of Economics: Microeconomics
William M. Finck
Class Notes
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This 3 page Class Notes was uploaded by Gabrielle Ingros on Sunday September 25, 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 6 views. For similar materials see Principles of Economics: Microeconomics in Economics at Auburn University.


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Date Created: 09/25/16
ECON 2020 Lecture 5: Elasticity • Determinants of Price Elasticity of Demand: o (1) Number of Substitutes – number of substitutes and elasticity move together o (2) Time in Which to Make the Purchase – time and elasticity move together o (3) Proportion of Income – proportion and elasticity move together (i.e. if your income decreases the elasticity increases because goods become a larger percent, “chunk” of your paycheck) o (4) Luxuries vs. Necessities – need and elasticity move opposite • Note: If you say you will still buy a good with a change of price – you are elastic, but if you say no – you are inelastic • Total Revenue and Price Elasticity: o Total Revenue – money earned from selling goods and services; NOT the same as profit, which includes costs § Total Revenue = P x Q o As P falls, Q rises, so what happens to Total Revenue? § It depends on elasticity (Left = Elastic & Right = Inelastic) ECON 2020 • Example: o P1 = $1 Q1 = 150 P2 = $1.25 Q2 = 100 § Find Ed (using the Midpoint Formula) and ΔTR o Ed = ((150-100)/((150+100)/2))/((1.25-1)/((1.25+1)/2)) = .4/.222 = 1.8 § Clearly, the total revenue falls o TR1 = 1 x 150 = $150 o TR2 = 1.25 x 100 = $125 § ΔTR = TR2 – TR1 = -$25 • Summary: o Ed > 1; price and TR move opposite o Ed < 1; price and TR move together o Ed = 1; a price change has no effect on TR • Price Elasticity Along a Linear Demand Curve: Price $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Quantity 0 1 2 3 4 5 6 7 8 9 10 Total Revenue 0 9 16 21 24 25 24 21 16 9 0 As P falls, the TR rises: ElastAs P falls, the TR falls: Inelastic • Graph: o Elasticity decreases as quantity increases o At the Midpoint: Ed = 1 (TR is maximized) • Other Types of Elasticities: o Price Elasticity of Supply: Es = %ΔQs / %ΔP § When S is inelastic, ΔD causes a big ΔPe § When S is elastic, ΔD causes a big ΔQe ECON 2020 o Income Elasticity of Demand: Ei = %ΔQd / %Δincome § Ei is positive for normal goods § Ei is negative for inferior goods o Cross Elasticity of Demand: Exy = %ΔQd of X / %ΔP of Y § Exy is positive for substitutes § Exy is negative for complements


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