ECONS 101 – 1st Edition Lecture 11 Outline of Last Lecture I. Consumer & Producer Surplus (Cont.)Outline of Current Lecture I. Elasticitya. How far can it stretch?b. Elasticity EquationCurrent LectureElasticity: a measure of responsiveness.- Price elasticity of demand (PED)o How responsive is Quantity Demand to changes in the price of the good.o (Should always come out negative, before absolute. Every. Time.)- Cross Price elasticity (CXED)o How responsive is Quantity Demand to changes in the price of a complement or substitute.o (Positive CXED Substitute ; Negative CXED Complement)- Income elasticity of demand (IED)o How responsive is Quantity Demand to changes in income.o Normal Vs. Inferior- Price elasticity of supply (PES)o How responsive is Quantity Supply to changes in the price of the good.o Must be positive.Elasticity: How far can it stretch?- Elastic e > 1- Inelastic e < 1 - Unit Elastic e = 1- Perfectly Elastic e = infiniteo Price is fixed. Quantity can go from zero to infinity. o Situation where the curve is horizontal. - Perfectly Inelastic e = 0o Quantity is fixed. Prices can go from zero to infinity. Supplied is still the same.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. DEMANDo Situation where the curve is vertical.ELASTICITY EQUATION:Elasticity (e) = % Change∈Q% Change∈PTwo ways of measuring % change: (% ∆)- Traditional = (Ending−InitialInitial)X 100 %- Midpoint = Ending−Initial(Ending+Initial2)X 100 % (This is the more correct equation. USE IT)- The line with the smaller slope is more elastic. o EX: Flatter demand curve- The line with the larger slope is more elastic.o EX: Steeper demand curveElasticity and Total Revenue:- Total Revenue Price X Quantity (P X Q)- Price Effect: a change in price leads to a change in revenue.- Quantity Effect: a change in price leads to a change in units
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