ECON 10a Lecture Notes - Lecture 5: Price Ceiling, Price Floor, Luxury Goods

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Other Demand Elasticity
Income Elasticity of Demand
Measures the how responsive Quantity Demanded is to a change in
income
% Change in Qd / % Change in Income
Sign Matters in this case
Ex. Person gets a 20 % raise in income
Pizza
+ Change in Qd/ 20 + = +
Almost certainly positive elasticity
T Rides
- Change in Qd / 20 + = -
Negative elasticity
For normal good
Elasticity is positive
The size of the income elasticity is significant
Ex.
A family member gets laid off, and then the income of the
family reduces 50%
Food
They might buy 15% less food
-15 / -50
Cruise
They probably will completely stop going on
cruises
100 / -50
Luxury goods
Have high income elasticities
Luxury good has an income elasticity greater than 1
Necessities have smaller elasticities
Necessities have an income elasticity less than 1
For inferior goods
Elasticity is negative
Cross Price Elasticity
How responsive the quantity demanded of good 1 is to a change in price of good
number 2
% change in Qd / % change in good 1
Ex. Coffee and Tea
There are two different cross price elasticity, coffee or tea could be the good 2
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Therefore, for any two goods there are 2 different cross-price elasticity
Sign matters
+ / +
Pairs of goods that are substitutes
Have positive cross price elasticity
Pairs of goods that are compliments
Have negative cross price elasticity
Elasticity of Supply
How responsive Quantity supply is to a change in the price of a good
% of change in Qs / % change in Price
If the line is steep, the elasticity is small
If the line is flat, the elasticity is big
Extreme Cases
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Time + the elasticity of supply
Depends on how long you give the firm to respond to the price change
Example
Factory
Inputs :
Equipment
Workers
Raw materials
Then the price rises permanently
If you look at this firm one month later
It will be ordering more raw materials and more people, but
it wouldn’t have time yet to create a new factory or install
new equipment, stuck with its current capacity and that
limits the amount extra that they can produce
Factory and Equipment, is physical capital
Same physical capital after one month
If you look at the firm 5 years later
Firm is using more of every input, including factor and
equipment
The point of increased production after one month
Short run supply curve
The point after 5 years
Long run supply curve
Elasticity of supply rises as producers have more time
Effects of Price Controls
Price Floor vs. Price Ceiling
Price Floor
Is a minimum legal price
Ex. Price floor of 11$
Legal to sell for 12$
Illegal to sell for 3$
Price Ceiling
Is a maximum legal price
Ex. Price ceiling of 500$
Legal to sell for 40$
Illegal to sell 3,000 or 501
Binding vs. Non-Binding
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