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Chapter 5 Part 2 notes

Chapter 5 Part 2 notes. When price increases from $4 to $5, TR declines from $24 to $20. . Figure 4 Elasticity of a Linear Demand Curve. Demand is elastic; demand is responsive to changes in price. Price. Elasticity is > 1 in this range. $7. 6. 5. 4. Elasticity is < 1 in this range.

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Chapter 5 Part 2 notes

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  1. Chapter 5 Part 2 notes

  2. When price increases from $4 to $5, TR declines from $24 to $20. Figure 4 Elasticity of a Linear Demand Curve Demand is elastic; demand is responsive to changes in price. Price Elasticity is > 1 in this range. $7 6 5 4 Elasticity is < 1 in this range. Demand is inelastic; demand is not very responsive to changes in price. 3 When price increases from $2 to $3, TR increases from $20 to $24. 2 1 14 12 0 6 8 10 2 4 Quantity

  3. Income Elasticity of Demand • Income Elasticity of Demand • Income elasticity of demandmeasures how much the quantity demanded of a good responds to a change in consumers’ income. • It is computed as the percentage change in the quantity demanded divided by the percentage change in income.

  4. Other Demand Elasticities • Computing Income Elasticity Remember, all elasticities are measured by dividing one percentage change by another

  5. INCOME ELASTICITY • Types of Goods • Normal Goods • Inferior Goods • Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. • Goods consumers regard as necessities tend to be income inelastic • Examples include food, fuel, clothing, utilities, and medical services. • Goods consumers regard as luxuries tend to be income elastic. • Examples include sports cars, furs, and expensive foods.

  6. Rule about income elasticity • If you calculate the income elasticity and the answer is positive, it is a normal good. • If you calculate the income elasticity and the answer is negative, it is an inferior good.

  7. Cross-Price Elasticity • A measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

  8. Rule about CPE • > 0 = subs • < 0 = comps

  9. Elasticity of Supply • Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good. • Price elasticity of supply is the percentage change in quantity supplied resulting from a percentage change in price.

  10. The Price Elasticity of Supply and Its Determinants • Ability of sellers to change the amount of the good they produce. • Beach-front land is inelastic. • Books, cars, or manufactured goods are elastic. • Time period • Supply is more elastic in the long run.

  11. Computing the Price Elasticity of Supply • The price elasticity of supply is computed as the percentage change in the quantity supplied divided by the percentage change in price.

  12. Supply $5 4 1. An increase in price . . . 2. . . . leaves the quantity supplied unchanged. Figure 5 The Price Elasticity of Supply (a) Perfectly Inelastic Supply: Elasticity Equals 0 Price 100 Quantity 0

  13. Supply $5 4 1. A 22% increase in price . . . 100 110 2. . . . leads to a 10% increase in quantity supplied. Figure 5 The Price Elasticity of Supply (b) Inelastic Supply: Elasticity Is Less Than 1 Price Quantity 0

  14. Supply $5 4 1. A 22% increase in price . . . 100 125 2. . . . leads to a 22% increase in quantity supplied. Figure 5 The Price Elasticity of Supply (c) Unit Elastic Supply: Elasticity Equals 1 Price (If SUPPLY is unit elastic and linear, it will begin at the origin.) Quantity 0

  15. Supply $5 4 1. A 22% increase in price . . . 100 200 2. . . . leads to a 67% increase in quantity supplied. Figure 5 The Price Elasticity of Supply (d) Elastic Supply: Elasticity Is Greater Than 1 Price Quantity 0

  16. 1. At any price above $4, quantity supplied is infinite. $4 Supply 2. At exactly $4, producers will supply any quantity. 3. At a price below $4, quantity supplied is zero. Figure 5 The Price Elasticity of Supply (e) Perfectly Elastic Supply: Elasticity Equals Infinity Price Quantity 0

  17. Applications • Can good news for farming be bad news for farmers? • What happens to wheat farmers and the market for wheat when university agronomists discover a new wheat hybrid that is more productive than existing varieties?

  18. 1. When demand is inelastic, an increase in supply . . . 2. . . . leads to a large fall S1 S2 in price . . . $3 2 Demand 100 110 3. . . . and a proportionately smaller increase in quantity sold. As a result, revenue falls from $300 to $220. Price of Wheat Quantity of 0 Wheat

  19. Compute the Price Elasticity of Demand When There Is a Change in Supply Demand is inelastic.

  20. Does Drug Interdiction Increase or Decrease Drug-Related Crime? • Drug interdiction impacts sellers rather than buyers. • Demand is unchanged. • Equilibrium price rises although quantity falls. • Drug education impacts the buyers rather than sellers. • Demand is shifted. • Equilibrium price and quantity are lowered.

  21. Price of Drugs Price of Drugs S2 D1 D1 D2 Quantity of Drugs Quantity of Drugs Drug Education Drug Interdiction Policies to Reduce the Use of Illegal Drugs S1 S1 It is amazing how useful knowledge of elasticities can be! But in one market the price goes up. In each case, the change in price is the same. while education shifts the demand. The demand for illegal drugs is inelastic. Interdiction shifts the supply, The changes in quantities (and TR) are remarkable. And in the other it goes down.

  22. Homework for tonight • P. 109/110 Probs/Apps: 4, 8, 10, 11

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