EC 111 1st Edition Lecture 5PREVIOUS LECTUREI. Surplus and ShortageII. Three Steps To Analyzing Changes In EquilibriumIII. Terms For Shift Vs. Movement Along CurveIV. Elasticity And Its ApplicationV. Calculating Percent ChangesCURRENT LECTUREI. The Variety Of Demand CurvesII. What Determines Price Elasticity Of DemandIII. Price Elasticity And Total RevenueIV. Price Elasticity Of SupplyV. The Variety Of Supply CurvesVI. Determinants Of Supply ElasticityVII. Other ElasticitiesTHE VARIETY OF DEMAND CURVES- The price elasticity of demand is closely related but is not equal to the slope of the demand curveo The reason for this is because slope is the ratio of two changes and elasticity is a ratio of two percent changes- Rule of thumb: o The flatter the curve, the more elastico The steeper the curve, the less elastic- Five Classifications of Demand Curves:1. Elastic Demanda. Demand curve is relatively flatb. Consumer price sensitivity is relatively highc. Elasticity is greater than 12. Inelastic Demanda. Demand curve is relatively steepb. Consumer’s price sensitivity is relatively lowc. Elasticity is less than 13. Unit Elastic DemandThese 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.a. Elasticity equals 1b. Percent change in quantity equals percent change in pricec. Types of goods that are unit elastic are random. Not one type4. Perfectly Inelastic Demanda. Demand curve is vertical b. No consumer price sensitivityc. Elasticity equals 0d. Goods may be inelastic to some people but not others5. Perfectly Elastic Demanda. Demand curve is horizontal b. Consumer sensitivity is extremec. Elasticity is equal to infinityd. This is an example of perfect competition-everyone has the same thingi. Commercial fisher manWHAT DETERMINES PRICE ELASTICITY- Determinants of elasticity of demand- Price elasticity is higher when close substitutes are availableo If the price of sunscreen and cereal goes up by 20%, which quantity demanded drops by more? Cereal. There are more substitutes (pancakes, waffles, oatmeal ect.). there are no substitutes for sunscreen- Price elasticity is higher for narrowly defined goods than broadly defined goodso If the price of lucky brand jeans and clothing goes up by 20%, which quantity demanded drops by more? Lucky brand. There are many other brands of jeans. Not many substitutes for clothing that are suitable.- Price elasticity is higher for luxuries than necessitieso If the price of insulin and a Caribbean cruise rises by 20% which quantity demanded goes down by more? The Caribbean cruise because it is not necessary for life A basic necessity like milk, bread, ect. are not perfectly elastic- Price elasticity is higher in the long run than in the short run because you have more alternativesin the long runPRICE ELASTICITY AND TOTAL REVENUE- A price increase has two effects on revenueo Higher price means more revenue on each unit (price effect)o Higher price means less units sold (quantity effect)- Is price effect or quantity effect greater? Depends on the elasticity- If demand is elastic, than the change in quantity is greater than the change in priceo The fall in revenue from lower quantity is greater than the increase in revenue from higher prices, so revenue falls- Don’t ever assume raising price will raise revenue- If demand is inelastic than price elasticity in less than 1, so the change in quantity is less than thechange in price- The fall in revenue from lower quantity is smaller than the increase in revenue from higher prices, so revenue risesPRICE ELASTICITY OF SUPPLY- Price Elasticity of Supply: measures of how much quantity supplied to a change in the price (measures of sellers price sensitivity)o Computed as: (% change in quantity supplied)/(% change in price)o Use the midpoint method to compute- Elasticity will always be positive because price and quantity move in the same direction (law of supply)THE VARIETY OF SUPPLY CURVES- Slope of supply curve is closely related to price elasticity of supplyo Rule of thumb:  The flatter the curve, the more elastic The steeper the curve, the less elastic- Five Classifications:1. Inelastic Supply Curvea. Supply curve is relatively flatb. Seller sensitivity is relatively lowc. Elasticity is less than 12. Unit Elastic Supply Curvea. Elasticity is equal to 13. Elastic Supply Curvea. Supply curve is relatively flatb. Seller sensitivity is relatively highc. Elasticity is greater than 14. Perfectly Elastic Supply Curvea. Supply curve is horizontalb. Seller sensitivity is extremec. Elasticity equals infinityd. Example of a competitive market, not firm. All markets in a firm have the same cost structures5. Perfectly Inelastic Supply Curvea. Supply curve is verticalb. There is no seller sensitivityc. Elasticity equals 0d. Stadium seats, parking spaces ect. are all fixedDETERMINANTS OF SUPPLY ELASTICITY- The more easily sellers can change the quantity they produce, the greater elasticity of supplyo Beach front property is harder to very than the supply of cars- For many goods, price elasticity of supply is greater in the long run than the short runo Firms can build new factories and new firms can enter the marketOTHER ELASTICITIES- Income Elasticity of Demand: measures response of quantity demanded to a change in consumer incomeo Computed as:(% change in quantity demanded)/(% change income)o Used to determine if goods are normal or inferioro A value of greater than 0 means it’s a normal goodo A value less than zero means its an inferior goodo If the value equals 0, it means you don’t buy it- Cross-Price Elasticity of Demand: measures the response of demand for one good to the changesin the price of another goodo Computed as: (% change in the quantity of good 1)/(% change in the price of good 2)o Used to determine if goods are substitutes or complementso A value greater than 0 means it’s a substituteo A value of less than 0 means it’s a