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ECON 1000 MIDTERM II - Review

by Anu J
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ECON 1000
Kieran Furlong

ECON 1000 Midterm #2 – study notes Price Elasticity of Demand What is elasticity? - always think about percentage changes: |E | d %∆Q ÷%∆P - if |d | >1, elastic o 1% ↓P results in >1% ↑Q - if |d | =1, unit elastic o 1% ↓P results in 1% ↑Q - if |d | =1, inelastic o 1% ↓P results in <1% ↑Q What is perfect inelasticity? - example: vial of insulin for diabetics o if P↓, Q will not increase o if P↑, Q will not decrease o they need it so they will continue to buy; Q will remain the same d - perfectly inelastic demand curve: What is perfect elasticity? - example: vending machines both selling coke o A sells 200 for $1 and B sells 200 for $1 also (perfect sub; comparable) o if A ↑ (small change, from $1 to $1.01) and P Bemains $1, then everyone goes to B, causing Q B o if A ↓ (small change, from $1 to $0.99) and P bemains $1, then everyone comes to A, causing Q B o perfectly elastic demand curve: ECON 1000 Midterm #2 – study notes Constant Unit Elasticity - %∆Q=%∆P - a demand curve with constant unit elasticity: Revenue and Elasticity - TR = Q*P - when plotting TR against Q / plotting TR against P (both are parabolic shapes), there will be some P, Q combination that will maximize TR (the vertex of the parabola) - in an elastic section of thecurve, ↓P, ↑Q alot ∴ TR↑ - in a unit elastic section of thecurve, ↓P ↑Qsame amount ∴TR does not change - in an inelastic section of the curve, ↓P, ↑Q abit ∴ TR↓ Cross Elasticity of Demand (CED) - price of one good affecting quantity of another - example: substitute goods (airline tickets) o perfect sub implies CED  ∞ o PA= P B $1000 and Q = QA= 20B tickets o then PA↑ to $1050 ∴ Q B to 400 and Q A to 0  %∆P =A(+50/1025avg) ∼ 4.9%  %∆Q =B(+200/300avg) ∼ 67% o CED for B in relation to A is (67%/4.9%) = 13.4 - example: complement goods (e-book and e-reader) o perfect comp implies CED  -∞ o complements of each other  e-readers are A; e-books are B  P A then Q B  P A then Q B - example: unrelated goods (random) o CED= 0 o basketballs vs. e-books o price of basketballs goes down; no effect on quantity of e-books demanded; no % change in e-books, then numerator is zero therefore there is no CED ECON 1000 Midterm #2 – study notes Demand Curve as Marginal Benefit Curve - demand curve can be a marg
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