OU ECON 1123 - Elasticity (3 pages)

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In this lecture we talked about elasticity of demand and the ways in which this occurs.

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The University of Oklahoma
Econ 1123 - Princ. of Econ-Micro
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ECON 1123 1st Edition Lecture 5 Outline From Previous Lecture Lecture 4 I Supply A Graphical View II Demand Supply and Price Determination in Competitive Markets III Changes in Demand and Supply A Increases in buyer s incomes B Stronger Buyer s tastes C Buyer s expect higher future prices and or higher future incomes D More buyers in the market E Higher prices for substitutes F Lower Price for Compliments Outline Lecture 5 I Changes in Demand or Supply The General Cases II Total revenue TR and Total expenditure TE III The concept of elasticity A Price Elasticity of Demand Ed 1 Three Possibilities 2 Relationship between Ed 3 Determinants of Ed Lecture 3 Notes IV Changes in Demand or Supply The General Cases This was just a review of the fact that if we have a higher demand then the demand schedule shifts to the right This makes price and quantity increase If supply increases the supply schedule will shift to the right and the price will go down while the quantity goes up V Total revenue TR and Total expenditure TE 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 Total Revenue and Total expenditure will always be the same TR and TE both equal price per unit times the number of units If Total revenue increases the price and quantity will increase But what happens when price goes down and quantity goes up see concept of elasticity VI The concept of elasticity Elasticity is a measure of how responsive buyers are to price changes everything else being the same B Price Elasticity of Demand Ed Elasticity of demand percentage change in quantity demanded percentage change in price 1 Three possibilities Elasticity of Demand 1 change in quantity demanded price change in other words a relatively small price change equals a large increase in demand Elasticity of Demand 1 change in quantity demanded change in price inelastic demand Elasticity of demand 1 change in quantity percent change in price unitary elastic Note What would perfect inelasticity look like A straight vertical line demand schedule No matter how much it costs people will be buying the same amount of the product Example A life saving surgery Perfect elasticity would look like a perfectly straight horizontal line on the demand schedule This means that you can sell as much quantity as you want and people will buy it at the price that the demand schedule occurs at example demand facing an individual competitive firm wheat farm sells wheat at 5 dollars per bushel This makes their whole crop able to be purchased at market price If they increased their price to 5 50 they would not sell any because their buyers know they can go elsewhere and get the crop for 5 dollars Note The reason they don t sell under this demand schedule is because sellers are always trying to maximize profits 2 Relationships between Elasticity demanded If Elastisity demanded 1 then price P and TR TE change in opposite directions Increase in total revenue decrease in price x increase in quantity Total expenditure increase If Elasticity Demanded is 1 inelastic then price P and TR TE change in the same direction Increase in TR a big increase in price x small decrease in quantity demanded Total expenditure to increase If Elasticity demanded 1 unitary elastic then price changes do not effect TR TE 3 Determinants of Elasticity number of substitutes available more higher less lower fraction of buyers income represented by price of the good lower fraction lower elasticity bigger fraction higher elasticity Tastes If the good is a necessity lower elasticity if the good is a luxury higher elasticity Time period to adjust to price change shorter time period lower elasticity longer time period higher elasticity

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