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U of M ECON 1101 - Income Elasticity, EconLand, and Marginal Cost

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Econ 1101 1st Edition Lecture 8Outline of Last Lecture II. Perfectly Inelastica. Supplyb. DemandIII. Perfectly Elastica. DemandIV. Inbetween CasesV. Short Run vs. Long Run ElasticityVI. Demand DeterminantsOutline of Current Lecture\I. Income Elasticity of DemandII. Normal GoodsIII. EconLandIV. Marginal CostV. Marginal Reservation PriceCurrent LectureWhat makes a good more elastic? Well, the longer time period you have and the more specific the good. For example food isn’t elastic, but Farmer Joe’s Brats are.Income Elasticity of Demand [IED]Elasticity^Income = %Change in Quantity Demanded/%Change in IncomeIf IED is >0 the good is a NORMAL good.If IED is <0 the good is a LUXURY good.Normal GoodsNecessities (0<Elasticity^Income<1)Luxuries (Elasticity^Income>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.EconLandAs economists, we cannot always study the real world how it is, so we must create an imaginable place where we create and control the variables. EconLand is our class economy. The reasons for Econland are simple: It tells us something informative and it is useful to examineefficiency of competitive markets an impacts of government policiesLet’s suppose only the “D” Demand people eat WIDGETS. A Demand person can only consume 1Widget. Each has a reservation price for one widget (the amount of dollars one would give up toget one widget).The “S” Suppliers do not eat any widgets, but they know how to make them. They only make at most 1 widget, and they won’t work for free. Their cost is the amount of dollars the demand is willing to give her so she is willing to make the widget.Marginal CostThe cost of the next one in (think of additional costs to sellers as a group due to the next unit).Marginal Reservation PriceThe value of the next one in (or additional value to buyers as a group that the next unit provides).Often referred to as marginal benefit.Consumer Surplus: (of a particular buyer) = reservation price – price paidProducers Surplus : (of seller) = price received -


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