ECON 202 1nd Edition Lecture 10 Outline of Last Lecture I. The Market at Work: Supply and Demand (continued)a. Three Market Conditionsb. Comparative StaticsOutline of Current Lecture II. Comparative Statics (continued)III. Elasticitya. Elasticity of DemandCurrent LectureComparative StaticsMarket for Pretzels:Assume Pretzels are a normal good and that salt is an input used to make pretzels. What will happen to the equilibrium price and quantity of pretzels if consumer’s income increases and theprice of salt increases?The increase in consumer wages will shift the demand curve to theright, causing an increase in price and an increase in the quantitydemanded. However, the increase in the price of salt, an input forpretzels, causes an increase in price and a decrease in quantity supplied.Because of these two effects, we can conclude that the price of pretzelswould increase, but the effect on the quantity of pretzels is indeterminate. ElasticitySensitivity – how a change in price affects the quantity demandedElasticity – the sensitivity of a goodExample: When price changes from $10 to $9, the quantity demanded could increase from 10 units to 11 units, or from 10 units to 50 units.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. PQS1D1P2Q2PretzelsD2Q1P1$10$910 11 50S2Total Revenue = the price × QuantityExample: A pizza store is losing revenue and you’re supposed to make it earn more money. Should you raise or decrease price? In order to determine what to do, you must know elasticity.Price Elasticity of Demand – measures the responsiveness of quantity demanded to a change inthe price of a good.ED represents Price Elasticity of Demand, so:ED = (the % change in quantity demanded) ÷ (the % change in price)- This formula is used for small percentagesIf ED is greater than 1, then demand is elasticIf ED is equal to 1, then demand is unitaryIf ED is less than 1, then demand is inelasticExtreme Cases:ED = 0. This means demand is perfectly inelastic.QD = 0QD= ∞ED= ∞. This means that demand is perfectly elastic.This Demand Schedule will give us a linear demand cure. Midpoint Formula – calculates the average elasticity between two points on a demand curveED=Q2−Q1Q1+Q2×P1+ P2P2−P1Linear Demand Curve: - Every point has a unique ED- Above the midpoint is elastic- Below the midpoint is inelastic- The midpoint is unitary elasticPrice Quantity Demanded Elasticity Total Revenue$8 1 52.61.5711.64.38.20$8$7 2 $14$6 3 $18$5 4 $20$4 5 $20$3 6 $18$2 7 $14$1 8 $80 1 2 3 4 5 6 7 8 90246810Demand CurveQanitity
View Full Document
Unlocking...