Econ 101 1st Edition Lecture 8Outline of Last Lecture I. Elasticity: The response of supply and demand to changes in price and incomeII. 5.1 The price elasticity of demandIII. 5.2 Using Price ElasticityOutline of Current Lecture I. 5.1 The Price of Elasticity of demand (continued)II. 5.4 Other elasticities of demandIII. 5.5 The price elasticity of supplyCurrent LectureIV. 5.1 The Price of Elasticity of demand (continued)a. Measuring the sensitivity to the change of priceV. 5.4 Other elasticities of demanda. Income elasticity demand: a measure of the responsiveness of demand to changes in consumer income; equal to the percentage change in the quantity demanded divided by the percentage change in incomei. Just income is changingii. Inferior good graph shifts to the leftiii. + #For a normal good and a - # for an inferior goodb. Cross-price elasticity of demand: a measure of the responsiveness of demand to changes in the price of another good. Equal to the percentage change in the quantity demand of one good (X) divided by the percentage change in the price of another good (Y).VI. 5.5 The price elasticity of supplya. Price elasticity of supply: a measure of the responsiveness of the quantity supplied to changes in price; equal to the percentage change in quantity supplieddivided by the percentage change in price.b. The price elasticity of supply is large if a small change in price can induce a big change in quantityi. Highly elastic supply implies that a small price changes will induce a lot of market entry (a highly competitive market) ii. Highly elastic supply implies that output can increase a great deal with only a small change in the cost of productionc. Perfectly inelastic supply: the price elasticity of supply equals zeroThese 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.d. Perfectly elastic supply: the price elasticity of supply is equal to infinityVII. 5.6 Using elasticities to predict changes in prices a. Under what conditions will an increase in demand cause a relatively small increase in price? (Same for supply)i. Small increase in demand (supply)ii. Highly elastic demandiii. Highly elastic supplyb. Memorize equations for the examc. Know definitions for the examd. Do the practice quizzes after studying the vocabVIII. Chapter 6 – Market Efficiency and the Case against government interventiona. What if we weren’t in equilibrium and how do we get there and why do we want to get there?IX. Market Efficiency and Government Interventiona. Efficiency: a situation in which people do the best they can, given their limited resourcesb. A persons behavior will not affect another person in this situationc. Market equilibrium = largest possible surplusi. No external benefitsii. No external costsiii. Perfect informationiv. Perfect competitionX. 6.1 Consumer surplus and producer surplusa. The demand curve and consumer surplusi. Willingness to pay: the demand curve shows maximum amount a consumer is willing to pay for a productii. Consumer surplus: the amount a consumer is willing to pay for a product minus the price the consumer actually pays; represented graphically by the vertical distance between the demand curve and the price paidb. The Supply Curve and Producer Surplusi. Willingness to accept: the minimum amount a producer is willing to accept as payment for a product; equal to the marginal cost of production. In the perfectly competitive market this is also the supply curve.ii. Producer Surplus: the price the producer receives for a product minus themarginal cost of production; represented graphically in the perfectly competitive market as the vertical distance between the supply curve andprice
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