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ECN104 - Ch 4 Notes.docx

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ECN 104
Thomas Barbiero

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ECN 104 – Chapter 4 Notes 4.1 Price of Elasticity of Demand Increase in price = decrease in quantity demand (vice versa) Elasticity = a measure of responsiveness of quantity to change in price Elastic demand = Q Dresponds strongly to change in P Inelastic demand = Q Dresponds weakly to change in P Simple Formula Ed= Midpoint Formula Ed= Interpretation of Elasticity of Demand Ed > 1, demand = elastic Ed = 1, demand = unit elastic Ed < 1, demand = inelastic Perfectly Inelastic = no matter how much P is, Q will never change Perfectly Elastic = if price increases, no one will buy 4.2 The Total Revenue Test Total Revenue (TR) = P x Q TR and Ed are related TR changes opposite from price = demand is elastic TR changes same from price = demand is inelastic TR does not change when price change = demand is unit elastic Price Elasticity along a Linear Demand Curve Demand = more elastic towards upper left Demand = less elastic towards lower right Discriminant of Ed Substitutability larger # of substitute = greater the price elasticity of demand Proportion of Income greater portion of income spent on a good = greater the price elasticity of demand Luxuries vs Necessities product demand = more elastic for lux (compared to necessities) b/c demand = inelastic Time product demand = more elastic, the longer the period of time under consideration Application of Ed Large Crop Yields demand for most crops = inelastic, a bumper of crop = reduce total revenue b/c price falls Sales Taxes tax goods, demand = inelastic price increase = not reduce sales by much Decriminalization of Illegal Drugs demand for drugs = inelastic legalization = reduce price, but Q demanded would not group much 4.3 Price Elasticity of Supply E s= Application of Price Elasticity of Supply Antiques & Reproductions real antiques = fairly inelastic supply demand increase = prices increase supply of reproduction = more elastic, thus much less price increase Volatile Gold Prices combo of highly elastic supply (take time to find gold deposits)
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