ECON 201: Microeconomics (Week 5)
ECON 201: Microeconomics (Week 5) Econ 201
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This 4 page Class Notes was uploaded by Jensine Bonner on Saturday March 5, 2016. The Class Notes belongs to Econ 201 at Towson University taught by Dr. Leppo II in Winter 2016. Since its upload, it has received 13 views. For similar materials see Microeconomic Principles in Economcs at Towson University.
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Date Created: 03/05/16
ECON 201 Microeconomics Notes taken, interpreted, and formatted by: Jensine Bonner Terms to Know: ^ (HH) - Household (BF) - Business Firm (G) - Government ^ (s) - services (g) – goods (l) - labor (S) - supply (P) - price ^ (QS) - Quantity Supply (QD) – Quantity Demand New (Es)- Elasticity Supply ^ (K) - Capital New (Ed)- Elasticity Demand New (PD)- Price Demanded New (TR)- Total Revenue ^ (MC) - Marginal Cost (MP) - Marginal Principle (MB) - Marginal Benefit Week 5 of Notes: Chapter 5- Elasticity 2/29/16 (P) Price of Elasticity of (D) Demand The overall responsiveness of (QD) to the changes in (P) Calculate -> Ed (The Price elasticity of Demand) % QD / % P Top: New QD- Old QD/Old PD Bottom: New P- Old P/ Old P Based on the #’s-> they’ll determine if you are elastic or inelastic Elastic : Consumers are responsive Ed > 1 (The Elasticity of Demand is Greater than 1) % QD > % P The P increases, and the QD decreases by a larger percentage Ex. P increases by 8%, so QD will decrease by 16% Inelastic : Consumers are not very responsive Ed < 1 (The Elasticity of Demand is Less than 1) % QD < % P The P increases, and the QD decreases by a slightly larger amount Ex. P increases by 8% so the QD will decrease by less than 16% Unit Elastic : Consumers are proportionally responsive Ed = 1 (The Elasticity of Demand is equal to 1) % QD = % D (Demand) Ex. The P decreases by 8, so the QD increases by 8. Ex. 2 Likewise, the P increases by 8, so the QD decreases by 8 3/2/16 Examples for calculating elasticity Example 1 % QD = 10% % P = 5% --------------------------- Ed= 10%/5% = .2 This means that a 5% change in price = a 10% change in demand Price Elasticity coefficient of Demand : % QD 12-2-/20 = l – 8/20l = 8/20= .4 -> 40% When working with the price elasticity o’ demand (1) of the 2 #’s will be negative. This means that you cannot assume that a problem will be inelastic. Must take the absolute value Determinants of Elasticity 1)Substitutes The items which we have more of are relatively elastic When there are not a lot of substitutes, the product(s) are inelastic 2)Time The longer the period of time, the more the substitute(s) will become available The longer/more = more elastic Less time= less elastic 3)Size of Budget (2) ways to address how elasticity is determined by the size of one’s budget 1) Income groups Poor, Middle (Class), Rich If one is Rich then, everything is inelastic. Why? You don’t need a substitute because you can pay for it with ease- little financial strain. (P) or (M) Most products tend to be elastic (There will be more than one option) 2) How much of the budget the item consumes or will consume Items that are lower priced will tend to be: inelastic Prices that are higher priced: elastic 4) Luxury Luxury items tend to be: elastic Consumers will tend to find a more cost efficient substitute 5) Necessity Despite the price, the consumer will buy it so, it is -> inelastic Most inelastic items: salt, & insulin Elastic: cars, movies Unit elastic: houses, fruit juice 3/4/16 Elastic: >1, % Q is larger than % P, decrease in total revenue when there is an increase in price, increase total revenue when there is a decrease in price Inelastic: < 1, % P is larger than the % in Q, increase in total revenue when there is an increase in price, decrease in total revenue when there is a decrease in price Unit Elastic : = 1, the % Q is = to the % P, there is no difference/change in total revenue when there is an increase or decrease in price - When inelastic, there will be a push to increase the price which is ultimately pushing toward unit elasticity - Unit elasticity = maximum revenue - Elasticity means that there will be a lower price, more & more customers, and then they will stop coming Supply Price elasticity of supply Responsive of producers to changes in price Es( Elasticity of Supply) = % QS/ % P - Producers are very responsive to price changes - With demand, be sure to take the absolute value, with supply, do not have to calculate it - The slope and origin determine the price elasticity - Inelastic take to the origin, origin- quantity - Unit elastic= proportionate End of Week 5 Notes. I hope that they were helpful to you. Notes will be uploaded weekly, so be sure to come back again! Up Next: Week 6 Notes - Jensine
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