ECON 251 1st Edition Lecture 6 Outline of Last Lecture I. TermsII. Changes in EquilibriumIII. Simultaneous Changes in Demand and SupplyIV. ElasticityV. The Ranges of ƐdVI. Determinates of ƐdVII. Calculating ƐdOutline of Current Lecture I. ExamplesII. Ɛd and RevenueIII. Other ElasticitiesIV. Determinates of ƐsV. Extreme CasesCurrent LectureI. Examples**NOTE: there is no connection between the midpoint of D and the equilibrium!!1. Calculating ƐdQd = 1/2P + 6(P = -2Qd + 12)P $2 (change) $4Qd 5  4Ɛd = 19 /22/ 3 = 2 / 92/3= 1/3 D is inelastic because 1/3 < 12. Qd = -4P + 24. At what point is the demand elastic?a. (4,5)b. (1,20)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.c. (16,2)d. (12,3)Answer: CII. Ɛd and RevenueRevenue = P * QdThe effect of an increase of the price on revenue is uncertain. - If Ɛd > 1, abs(%ΔQd) > abs(%ΔP)o An increase in price  decrease in Qd is “big” Decrease in revenueo A decrease in price  increase in Qd is “big” Increase in revenueo Revenue follows Qd- If Ɛd < 1, abs(%ΔQd) < abs(%ΔP)o An increase in price  decrease in Qd is “small” Increase in revenueo A decrease in price  increase in Qd is “small” Decrease in revenueo Revenue follows P - If Ɛd = 1: revenue is maximized bo Because abs(% ∆Qd% ∆ P) = Ɛd = 1Example: Qd = -1/2P + 6 (P = -2Qd +12)P: $2  $4 P: $8  $10Qd: 5  4 Qd: 2  1Revenue: 10  6 Revenue: 16  10= Ɛd < 1 = Ɛd > 1(inelastic) (elastic) In both cases the price changed by 2, and the quantity changed by 1III. Other Elasticities- Income elasticity = % ∆Qd% ∆ Income > 0 Normal good(because %ΔQd increased and %ΔIncome increased)Example: income: changed from $50,000 to $60,000You: increased Qd of cars from 1  2= 13 / 21000050000 = 2/ 32 /11 = 11/3 > 0 - Cross-Price Elasticity (also called Cross Elasticity) = % ∆Qdx% ∆ Py- Price Elastic of Supply = % ∆Qs% ∆ Po Three Ranges:1. Ɛs > 1  Supply is elastic2. Ɛs < 1  S is inelastic3. Ɛs = 1  S is unit elasticIV. Determinates of Ɛs1. Availability of substitute inputsa. If easy to find substitute inputs (easier to produce)  more elastic S2. Timea. (Ex: more time if you need to train workers etc.)b. More time a seller has to react to a price change  more elastic SV. Extreme CasesƐd = abs(% ∆Qd% ∆ P) = 0 because %ΔQd  0“perfectly inelastic”Ɛs = 0 “perfectly inelastic S”Ɛd = abs(% ∆Qd% ∆ P) = ∞ because %ΔP  0“perfect elastic” demand curveƐs = ∞“perfect elastic” supply