ECON 201 1st Edition Lecture 4I. 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 haveB.) 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 AII. 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 elasticityB.) 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 10o %∆Q = -6/7o %∆P = ½o ED = %∆Q/%∆P = -12/7o ED = -12/7 is elastic because ED > 1These 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
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