ECON 201 1st Edition Lecture 4 I Logical Thinking A Market Clearance Everyone goes home happy There is not a consumer that is not able to buy a product at a price they don t have B Demand Shift Analysis The new price where the market clears is the new equilibrium C For Midterm Income goes up for an inferior good what do you expect for prices Recognize that prices went up if this good was inferior what could you say changed in income D What if Supply and Demand change Suppose both demand and supply rise Increase in demand puts upward pressure on prices and an increase in supply puts downward pressure on prices If demand wins out then there is an increase in price If supply wins out then there is a decrease in price If two things are moving at once then you need to think about 1 being bigger then think about the other being bigger and see which one wins out If A causes B it doesn t necessarily mean that B is a result of A II Elasticity The economist s measure of socks A Elasticities tell us the size or economic magnitude of shocks Whenever you hear how much it is measured by elasticity B Price Elasticity of Demand Ed elasticity of demand tells us the responsiveness of consumers to change in price Percentage change of quantity divided by the percentage change of price E Q E P X new old average new old Suppose prices rise from 6 to 10 o Q 6 7 o P o ED Q P 12 7 o ED 12 7 is elastic because ED 1 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 If the Elasticity of Demand Ed 1 is less then 1 we say demand is inelastic not flexible In order for the ED to be bigger than 1 then the Q needs to be larger than P You aren t going to buy more or less of anything inelastic C The Determinants of Elasticity More substitutes more elastic demand Lipator cholesterol medication patent expired and generics were allowed to be sold as soon as generics became available the demand on the name brand Lipator went down Larger fraction of income more elastic demand The average American consumer spends around 28 of income on housing Don t notice a rise in gum prices but a rise in housing prices is more noticeable Longer time since price shock more elastic demand
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