Micro Econ Chapter 4 Lecture Notes PDF

Preview

Summary

Chapter 4● Price Elasticity of Demand: a measure of how responsive buyers are to price changesPrice Elasticity of Demand = % change ∈ quantity demanded % change ∈ that good ' s price● Inelastic Demand when |PED| < 1 ○ Quantity is not responsive to change in price ● Elastic Demand when |PED| &...

Description

Chapter 4 ● Price Elasticity of Demand: a measure of how responsive buyers are to price changes Price Elasticity of Demand =

% change∈quantity demanded % change∈that good ' s price

● Inelastic Demand when |PED| < 1 ○ Quantity is not responsive to change in price ● Elastic Demand when |PED| > 1 ○ Quantity is very responsive to change in price ● Unit-Elastic Demand when |PED| = 1 ● Perfectly Inelastic Demand when |PED| = 0 ○ Quantity does not respond at all to change in price ● Perfectly Elastic Demand when |PED| = ∞ ○ Any change in price leads to an infinitely large change in quantity

● Midpoint Formula: measures the percent change between any two points relative to the midway between those two points % change in quantity demanded =

% change in price =

Q 2−Q 1 x 100 (Q 2+Q 1)/2

P 2−P 1 x 100 (P 2+P 1)/2

● Total Revenue: the total amount you receive from buyers ○ After a price decrease, the quantity effect tends to increase total revenue. Total Revenue = Price x Quantity

● Price Effect: After a price increase, each unit sold sells at a higher price, which tends to raise revenue ● Quantity Effect: After a price increase, fewer units are sold, which tends to lower revenue

● Cross-Price Elasticity of Demand: A measure of how responsive the demand of one good is to the price changes of another ○ Positive for substitutes ○ Negative for complements ○ Near zero for independent goods Cross-Price Elasticity of Demand =

% change∈quantity demanded % change∈price of another good

● Income Elasticity of Demand: A measure of how responsive the demand for a good is to changes in income ○ Positive for normal goods ○ Larger than 1 for luxury goods ○ Negative for inferior goods Income Elasticity of Demand =

% change∈quantity demanded % change ∈ income

● Price Elasticity of Supply: a measure of how responsive sellers are to price changes ○ Price and quantity changes always move in the same direction. ○ The larger the number, the more responsive sellers are to price. ○ Decreases in input costs and a long time since a price change tend to increase the price elasticity of supply. Price Elasticity of Supply =

% change∈thequantity supplied % change∈that good ' s price...