ECON 1123 1st Edition Lecture 9 Outline From Previous Lecture Lecture 8 I Changes in Relative Prices A correction II Individual and Market Demand Schedules III A More sophisticated view of Relative Price Change Outline Lecture 9 I Other Elasticity Measures A Price Elasticity of Supply Es B Income Elasticity of Demand Ey C Cross Elasticity of Demand Eab Lecture 8 Notes II Other Elasticity Measures D Price Elasticity of Supply Es measurement of how responsive sellers are to price changes Es percentage change in quantity supplied percentage change in price Note this is movement along a given supply schedule not a shift in the schedule Three Possibilities Es 1 elastic Es 1 inelastic Es 1 unitary elastic Es and time Firms generally have 2 types of inputs resources a Variable inputs example labor and raw materials b Fixed inputs example capital or plant capacity Three time periods 1 Market period Time period so short that output and the number of firms in the industry are fixed 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 2 Short Run Plant capacity fixed input and number of firms in the industry are fixed but firms can hire more workers labor and or use more raw materials variable inputs 3 Long Run Plant Capacity and number of firms in the industry could change entry into or exit from the industry Es and time shown graphically Market period Es 0 which means its perfectly inelastic so it will be a straight line vertically Short run the supply curve will now be very steep but will not be straight up and down anymore Long Run There will be a greater elasticity so the supply curve will be flatter than the other two time periods E Income Elasticity of Demand Ey Ey percentage change in quantity demanded percentage change in income Three possibilities of this fraction 1 0 Ey 1 some fraction between 0 and 1 normal goods example Income goes up 10 increase consumption by 5 2 Ey 1 income superior goods luxury goods example income goes up 10 increase consumption by 12 3 Ey 1 inferior goods powdered milk public transportation example 10 raise in income 2 decrease in the consumption of inferior goods F Cross Elasticity of Demand Eab Eab percentage change in quantity demanded of product A percentage change in price of product B Eab 0 if A and B are substitutes Eab 0 if A and B are compliments used together Eab 0 if A and B are unrelated Case study Alcoa Anti Trust Case Allegation Alcoa s aluminum foil was monopolizing the market What is the relevant market food wrapping materials The found out that Eab 0 so the products are unrelated so Alcoa could keep making aluminum foil at will
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