ECC1000 Lecture Notes - Lecture 3: Normal Good, Price Controls, Market Economy
23 May 2018
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Week 3 To do: Read Chap 5, Complete Aplia test by Sunday 23:30
Elasticity and its Applications
Motivation for Elasticity
●Law of Demand, that the quantity demanded of a good changes when the price of the
good changes. But how much does it change?
●Law of Supply, that the quantity supplied of a good changes when the price of the
good changes. But how much does it change?
●Quantity demanded of a good changes when the income of buyers changes. But how
much does it change?
○Normal good = quantity of demand increases
○Inferior Good = quantity of demand decreases
●Quantity demanded of a good changes when the price of related goods changes. But
how much does it change?
●In general we want to know, how much Y changes when X changes (what is the
magnitude of the change?)
○Can measure by taking the change in Y divided by the change in X = ΔY/ΔX
■Δ = “Change in”
■Problem = change in units of measurement affects magnitude accuracy
■Eg:
●% of change = unaffected by units of measurement = USE % not just change
○
●X elasticity of Y =
○= independent of units of measurements = BETTER
○Can sometimes be the other way BUT normally X independent and Y
dependent (dependant/independant)
●% of change =
Four Important Elasticities
(Own) Price Elasticity of Demand
●We can construct an elasticity from any two (continuous) variables
●
●Since it’s always negative (by the law of demand), we drop the negative sign
●Law of demand: Price increase, quantity demanded decrease
●Law of demand = direction; elasticity = magnitude of quantity demanded decrease
●
○If prices increase by 1%, then quantity demanded decreases by X%
○NOTE: we drop the minus sign because we KNOW that Law of demand =
decrease in quantity demanded when price increases.
Cross Price Elasticity of Demand
●
●If it is positive, the two goods are substitutes (price of related good increase, quantity
demanded increase)
●If it is negative, the two goods are complements (price of related good increase,
quantity demanded decrease)
●
○All substitutes
○REMEMBER: when dependant and independant are switched you are asking
different questions!
●Good for government regulatory agencies
○Eg: ACCC = approve or reject mergers, can’t allow mergers where there is
positive cross-price elasticity because then competition is being removed. If it
is close to zero then mergers can be allowed as they provide weak substitutes
and still protect consumers.
Document Summary
Week (cid:546) to do: read chap (cid:548), co(cid:299)plete aplia test by )u(cid:300)day (cid:545)(cid:546):(cid:546)(cid:543) Law of demand, that the quantity demanded of a good changes when the price of the good changes. But how much does it change? good changes. Law of supply, that the quantity supplied of a good changes when the price of the. Quantity demanded of a good changes when the income of buyers changes. Normal good = quantity of demand increases. Inferior good = quantity of demand decreases. Quantity demanded of a good changes when the price of related goods changes. In general we want to know, how much y changes when x changes (what is the how much does it change? magnitude of the change?) Can measure by taking the change in y divided by the change in x = y/ x. Problem = change in units of measurement affects magnitude accuracy.
