New version page

OU ECON 1123 - Elasticity

Type: Lecture Note
Pages: 3

This preview shows page 1 out of 3 pages.

View Full Document
View Full Document

End of preview. Want to read all 3 pages?

Upload your study docs or become a GradeBuddy member to access this document.

View Full Document
Unformatted text preview:

ECON 1123 1st Edition Lecture 5 Outline From Previous Lecture (Lecture 4)I. Supply: A Graphical ViewII. Demand, Supply and Price Determination in Competitive MarketsIII. Changes in Demand and SupplyA. Increases in buyer’s incomesB. Stronger Buyer’s tastesC. Buyer’s expect higher future prices and/or higher future incomesD. More buyers in the marketE. Higher prices for substitutesF. Lower Price for ComplimentsOutline Lecture 5I. Changes in Demand or Supply: The General CasesII. Total revenue (TR) and Total expenditure (TE)III. The concept of elasticityA. Price Elasticity of Demand (Ed)1.Three Possibilities2. Relationship between Ed3. Determinants of EdLecture 3 NotesIV. Changes in Demand or Supply: The General CasesThis 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 price1. 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 wantand 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=TE3. 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


View Full Document
Loading Unlocking...
Login

Join to view Elasticity and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Elasticity and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?