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OU ECON 1123 - A broader view of Elasticity

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ECON 1123 1st Edition Lecture 9 Outline From Previous Lecture (Lecture 8)I. Changes in Relative Prices: A correctionII. Individual and Market Demand SchedulesIII. A More sophisticated view of Relative Price ChangeOutline Lecture 9I. Other Elasticity MeasuresA. Price Elasticity of Supply (Es)B. Income Elasticity of Demand (Ey)C. Cross Elasticity of Demand (Eab)Lecture 8 NotesII. Other Elasticity MeasuresD. Price Elasticity of Supply (Es) – measurement of how responsive sellers are to price changesEs= percentage change in quantity supplied/percentage change in priceNote: 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 fixedThese 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 verticallyShort run- the supply curve will now be very steep but will not be straight up and down anymoreLong Run- There will be a greater elasticity so the supply curve will be flatter than the other two time periodsE. Income Elasticity of Demand (Ey)Ey= percentage change in quantity demanded/ percentage change in incomeThree 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 goodsF. Cross Elasticity of Demand (Eab)Eab= percentage change in quantity demanded of product A / percentage changein price of product BEab>0 if A and B are substitutesEab<0 if A and B are compliments (used together)Eab=0 if A and B are unrelated!Case study:Alcoa Anti-Trust CaseAllegation: Alcoa’s aluminum foil was monopolizing the marketWhat is the relevant market? -> food wrapping materialsThe found out that Eab=0 so the products are unrelated so Alcoa could keep making aluminum foil at


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