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Micro Chapter 18 Cont’d

Elasticity, Total Revenue and Surplus. Micro Chapter 18 Cont’d. Quick Check 1. Items that are necessities are considered to be _____________ inelastic. Quick Check 2. If TR and price go in opposite directions, the good is considered to be _______ Elastic. Quick Check 3.

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Micro Chapter 18 Cont’d

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  1. Elasticity, Total Revenue and Surplus Micro Chapter 18 Cont’d

  2. Quick Check 1 • Items that are necessities are considered to be _____________ • inelastic

  3. Quick Check 2 • If TR and price go in opposite directions, the good is considered to be _______ • Elastic

  4. Quick Check 3 • List the determinants of elasticity • P- the proportion of income spent on the good • A- availability of close substitutes (the more subs. The more elastic) • I- the importance of a good (luxury v necessity) • D- the ability to delay the purchase (the more time, the more elastic)

  5. Quick Check 4 • If a good has an elasticity coefficient of 0, that good is said to be ___________ • Perfectly inelastic

  6. $8 7 6 5 4 3 2 1 a b c Price d e f g h 0 0 1 2 3 4 5 6 7 8 Quantity Demanded Price Elasticity Elastic Ed > 1 Unit Elastic Ed = 1 Inelastic Ed < 1 D

  7. Excise Taxes • Governments tend to tax inelastic products to ensure high revenues • Ex- liquor, gasoline and tobacco

  8. Price Elasticity of Supply • If producers are relatively responsive to price changes, supply is elastic. If producers are relatively unresponsive to price change, supply is inelastic • Es = Percentage change in quant supplied of product x/percentage change in price of product x • Or….Es = change S/sum of S/2 / change P/sum P/2 • Ex- Solve Es for an increase in price from $4-6 and increase in quantity supplied from 10 units to 14 units (use midpoint)

  9. Check your work • Es = change quant supplied/(sum of Qs/2)/(change price/sum of P/2) • = ((14-10)/(14+10/2))/((6-4)/(6+4/2)) • = (4/12)/(2/5) • = .33/.40 • = .83

  10. Price Elasticity of Supply Cont’d • The degree of price elasticity of supply depends on how easily and quickly producers can shift resources between alternative uses

  11. Market Period • A period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied

  12. Market Period Continued • Ex- perishable items are perfectly inelastic such as beets. Farmers will sell all of their product because they will go bad • The market period for a farmer is the growing season

  13. Short run • a period of time too short to change plant capacity but long enough to use fixed plant more or less intensively

  14. Long Run • Time period long enough for firms to adjust plant sizes and for new firms to enter and old firms to leave an industry • Ex- in the tomato industry the farmer has time to acquire new land and buy machinery. Over time more farmers will shift to tomatoes if profitable

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