ECON 203 1nd Edition Lecture 12Outline of Last Lecture I. Elasticity(cont.)a. Perfectly inelasticb. Inelastic demandc. Unit elasticd. Relatively elastice. Perfectly elasticII. Factors the affect elasticitya. Substitute goodsb. Fraction of budgetc. Time frameIII. Second law of demandOutline of Current LectureI. Elasticity of Supplya. Perfectly inelastic supplyb. Relatively inelastic supplyc. Unit elasticd. Relatively elastic supplye. Perfectly elastic supplyII. Cross Price Elasticity of Demanda. Substitutesb. ComplementsIII. Income Elasticity a. Normal goodsb. Inferior goodsCurrent LectureI. Elasticity of SupplyEs= (∆% in Qsx)/(∆% in Px)Remember: first law of supply states that as the price of good x increases, we will see an increase in Qs—they have a direct relationship: when price increases, so will quantity supplied. When price decreases so will quantity supplied. In all cases Es will be positiveThese 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.a. Perfectly inelastic supply- sellers are unresponsive to changes in the price of good x(violation of the first law of supply)Ex.) selling crops- when harvest comes around, if a price of a bushel is twice what you planned on it to be, you cannot suddenly grow more product, you will sell the same amount you originally planned but at a higher priceb. Relatively inelastic supply- Es is between 0 and 1. Sellers are still not very responsive to changes in the price of xc. Unit elastic-Es=1. Changes in the price of good x will see the exact same change in quantity supplied.d. Relatively elastic supply- Es is between 1 and infinity. The change in quantity suppliedis greater than the change in the priceEx.) a 10% raise causes you to work 30% moree. Perfectly elastic supply- Es = infinity. Ex.) a raise of $0.01 causes you to work foreverII. Cross Price Elasticity of Demand (Exy)Tells if 2 goods are substitutes or complements of each otherExy= ( %∆ in demand for good x)/( %∆ in price of good x)Every product will have an effect on every other product, since they each affect your budget, therefore Exy will never be 0. a. SubstitutesExy is positiveWhen the price for good x increases, the demand for good y will increaseEx.) a 10% increase in the price of rum causes a 10% increase in demand for coca-cola. Exy= (+10)/(+10)=1—substitutesb. ComplementsExy is negativeWhen the price for good x decreases, the demand for good y will increaseEx.) a 10% increase in the price of rum causes a 10% decrease in demand for coca-cola.Exy= (-10)/(+10)=-1—complementsIII. Income elasticityTells whether a good is normal or inferior.EI= ( %∆ in demand for good x)/( %∆ in income)a. Normal goodsEI is positiveb. Inferior goodsEI is negativeEx.) a 5% increase in income causes a 10% decrease in good x. EI= (-10)/(+5)= -2Inferior
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