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Chapter 6 notes - elasticity factors

by: Moriah Gerber

Chapter 6 notes - elasticity factors ECON 142

Marketplace > Kansas > Micro Economics > ECON 142 > Chapter 6 notes elasticity factors
Moriah Gerber
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These notes describe all you need to know about elasticity, including the factors to make it change for both supply and demand, and the equations to calculate elasticity!
Dr. Brian Staihr
Class Notes
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This 5 page Class Notes was uploaded by Moriah Gerber on Monday September 26, 2016. The Class Notes belongs to ECON 142 at Kansas taught by Dr. Brian Staihr in Fall 2016. Since its upload, it has received 11 views. For similar materials see Microeconomics in Micro Economics at Kansas.


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Date Created: 09/26/16
Monday, September 19, 2016 Chapter 6 Price Elasticity - two things I've bought in the last week: cheez-its and a t-shirt from target - the first thing you wrote down, if the price had been 50% lower would you have bought more of them? yes. - the second thing you wrote down, if the price would have been 50% higher would you have still bought it? no. - Elasticity = responsiveness • when the price changes, does the quantity demanded respond by changing a little or a lot? • the bigger the “response”, the more “elastic” demand is. Two types of responses to elasticity - One type of response: buy more or buy less. - Another type of response: buy or don't buy period. - If the price changes and you buy the same amount you were going to buy anyways, you did not respond to that price change • your demand is not responsive • your demand is not “elastic” - If the price changes and you buy a little more/less than you were going to buy anyways, you had some response to that price change • your demand is somewhat responsive • your demand is somewhat elastic - If the price changes and you buy a lot more/less than you were going to buy anyways, you had a big response to that price change. • your demand is very responsive • your demand is very elastic 1 Monday, September 19, 2016 Why do we care? - Elasticity of demand determines whether you earn more revenues… • by selling more units at a lower per-unit price or • by selling fewer units at a higher per-unit price - Elasticity of demand also determines the size of margin (or profit) on a product What makes a good have a demand that is elastic or inelastic: 1. Number of substitutes - lots of substitutes = demand is elastic (responsive) - few substitutes = demand is inelastic (not responsive) 2. Luxury or necessity - luxury = demand is elastic (responsive) - necessity = demand is inelastic (not responsive) 3. How broadly the market is defined - defined narrowly = demand is elastic (responsive) - defined broadly = demand is inelastic (not responsive) 4. Size of the good in the consumer’s budget (price relative to income) - Large part of budget = demand is elastic (responsive) - Small part of budget = demand is inelastic (not responsive) 5. Amount of time buyer has to adjust How elasticity works (VERY IMPORTANT!!!) *must memorize* - If demand is elastic and you lower the price your total revenues will increase - if demand is elastic and you raise the price your total revenues will decrease - if demand is inelastic and you lower the price your total revenues will decrease 2 Monday, September 19, 2016 - if demand is inelastic and you raise the price your total revenues will increase Calculating elasticity Price elasticity = percentage change in the quantity demanded / percentage change in the price Price Elasticity = % change in quantity demanded % change in price We can calculate elasticity if we know 4 pieces of information: 1. the original price 2. the new price 3. the original quantity demanded 4. the new quantity demanded (Change in quantity demanded / average quantity demanded) (Change in price / average price) - a good whose demand elasticity falls between 0-1 (in absolute value) has a demand that is inelastic - elasticity is a negative number - Elasticity is NOT slope • elasticity changes, slope does not Cross price elasticity - How does the quantity demanded of good “x” change when the price of good “y” changes? 3 Monday, September 19, 2016 - Cross price elasticity is negative when two goods are complements - Cross price elasticity is positive when two goods are substitutes - the “S’s” (substitutes and positive) go together and the “n’s” (complements and negative) go together **Need to know for exam** - Price of elasticity of demand • characteristics of a good/service • calculating it • using it relationship between elasticity and total revenues • Price Elasticity of Supply - When the price changes the quantity supplied will change (How responsive is the supply to a change in the price) • - % Change in Quantity suppled / % Change in Price - Both equations are the same for both supply and demand - TIME: As more time passes, supply becomes more elastic (if you're the seller) • the only thing that effects the elasticity of supply - Elasticity of supply and time: • you're the producer, buyers are “bidding up” the price of your product • Right now: You can only supply what you have in stock More time? You can employ your workers longer hours • • Even more time? You can expand your factory or build new capacity Income elasticity of demand - How the quantity demanded changes when your income changes 4 Monday, September 19, 2016 - Necessity? Income elasticity is positive but small • Gas: become richer you fill up on gas when your tank is only half way full instead of empty - Luxury? Income elasticity is positive but large • Jewelry: become richer and buy something you otherwise would not have bought, like jewelry - Inferior good? Income elasticity is negative Combining elasticity with what we’ve done before (NOT in the book) - Calculate Supply: Elasticity of supply / elasticity of supply + Elasticity of demand - That number is the percentage of any tax that will fall on the buyer - Supply on top: talking about buyer - Demand on top: talking about producer - Calculate Demand: Elasticity of demand / elasticity of supply + elasticity of demand - That number is the percentage of any tac that will fall on the seller - Not explicitly in your book: • The more elastic the supply is, the more of the tax falls on the BUYER • The more elastic the demand is, the more of the tax falls on the SELLER Practice problem: Calculate what portion of a $10 tax will fall on the buyer, and what portion on the seller? P Q P Q 76 14 50 10 70 16 52 14 5


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