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Microeconomics Chapter 6 Notes

by: Danyn Notetaker

Microeconomics Chapter 6 Notes ECON 1010

Marketplace > Tulane University > Economcs > ECON 1010 > Microeconomics Chapter 6 Notes
Danyn Notetaker

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Presentation notes and lecture notes
Armine Shahoyan
Class Notes
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This 2 page Class Notes was uploaded by Danyn Notetaker on Thursday March 3, 2016. The Class Notes belongs to ECON 1010 at Tulane University taught by Armine Shahoyan in Summer 2015. Since its upload, it has received 18 views. For similar materials see Microeconomics in Economcs at Tulane University.

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Date Created: 03/03/16
Introduction - Elasticity of Demand measures how much the quantity demand changes with a given change in price of an item, consumers income, or price of a related item - Price elasticity is a concept that also relates - This chapter explores both elasticity of supply and demand and applications of the concept Price Elasticity of Demand - Law of demand says that consumers will respond to a price decrease by buying more, but not how much - The degree of responsiveness or sensitivity of consumers to a change in price is measure by the concept of price elasticity of demand • If consumers are relatively responsive to price change, demand is said to be elastic • If consumers are relatively unresponsive, demand is inelastic • Formula of Price elasticity of Demand ED = %of change in demand/ % change of price • Using two price quantity combination of a demand schedule, calculate the percentage change in quantity by dividing buy of of the two original quantities. Then calculate the % change in price by diving the absolute change in price bye one of the original prices • Estimate the elasticity of this region of the demand schedule by comparing the % change in quantity and the % change in price. Do Not use the ration formula. Remember that the two percentage changes that are being compared when determining elasticity • Of other original quantity and price were use as the denominator or the % changes would be different - Use the overage of the prices and quantity to avoid this problem - Using average — midpoint formula ED = (Change in quantity/Sum of quantity/2)/(Change in price/sum of price/2) • Using traditional calculations, the measured elasticity over a given range of prices is sensitive to whether price drops or rises. The midpoint formula calculates the average elasticity over a range of prices - Ensures elasticity • Emphasis: The % changes are compared, not the absolute changes - Absolute changes depend on choice of units - % also makes it possible to compare elasticity of demand for different products • Because of the inverse relationship between price and quantity demanded, the actual elasticity of demand will be a negative number. Ignore the negative sign and use the absolute value - ED>1 demand is elastic - ED=1 Demand is unit elastic - ED <1 demand is inelastic • Extremes - ED = 0 perfectly inelastic - ED = infinity perfectly elastic • Inelastic does not mean consumers are not responsive — vise versa - Graphical analysis • Elasticity varies over range of prices - Cross elasticity - Positive income elasticity indicates a normal or superior good - Negative income elasticity indicates and inferior good - Those industries that are income elastic will expand at a higher rate as the economy grows - Total revenue test is the easiest way to judge whether demand is elastic or not • Elastic: Demand is elastic if a decrease in price seats in a rise in total revenue, or if an increase in price results in a decline in total revenue • Inelastic: Demand is inelastic if a decrease in price decrease in price results in a fall in total revenue, or rise in price raises total revenue Unit Elasticity: Demand has unit elasticity if total revenue doesn’t change with price - • There are several determinants of the price elasticity of demand • Substitution for te product: Generally, the more substitutes, the more elastic the demand • Proportion of price relative to income: Generally, the larger the expenditure relative to one;s budget, the more elastic the demand, because buyer notice change in price more • Luxuries vs. necessities: In general, the more that a good is considered to be a ‘luxury’ rather than ‘necessity’, the greater a products elasticity • Time: Generally, product demand is more elastic the longer timer period under consideration - There are many practical applications of the price elasticity of demand Inelastic demand for agricultural products helps explain why bumper crops depress the • prices and total revenue e for farmers • Governments look at elasticity when levying tax Price Elasticity of Supply - The concept of price elasticity also applied to supply • As with price elasticity of demand, the midpoint formula is more accurate - The ease of shifting resources between alternate uses is very important in price elasticity of supply because it will determine how much flexibility a producer has to their output to change in the price • The degree of flexibility will be different in different industries - Applications of the price elasticity of supply • Antiques • Gold Cross Elasticity and Income Demand - Cross elasticity of demand refers to the effect of a change in a products price on the quantity demand for another product - Formula EXY = % change in quantity demand X/% change in the demand price Y • If cross elasticity is positive, then X and Y are subtitles • If cross elasticity is negative, then X and Y are complements - Income elasticity of demand refers to % change in quantity demanded that results from % change in consumer incomes - Formula EI = % change in quantity Demanded/ % change in income Income Elasticity of Demand - Measures responsiveness of buyers to changes in their income - Normal goods is positive - Inferior of negative


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