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Chapter 4-9

Microeconomics (ECO102) Chapter 4-9.docx

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Bishop's University
ECO 102
Thierry Eyland

Chapter 4 1. Price elasticity of demand a. N = %change QD / % change P b. Law of demand P goes up QD goes down c. 5 cases i. Perfectly inelastic demand 1. n = 0 ii. Inelastic demand 1. 0 < n < 1 2. A change in P will cause a small change in QD iii. Perfectly elastic demand 1. N = infinity 2. No change in P regardless of change in QD iv. Elastic demand 1. 1 < N < infinity 2. Even a small change in P will induce a relatively large change in QD v. Unitary elastic demand 1. N = 1 d. Factors affecting N i. Availability of substitutes ii. Necessities versus luxuries iii. Definition of the market / good 1. Narrowly defined  more elastic 2. Broadly defined  inelastic demand iv. Time horizon 1. Good tend to have more elastic demand over longer periods of time 2. P of electricity goes up QD for electricity remains more or less the same in the short-run (inelastic demand) 3. New energy sources  QD for electricity goes down (more elastic demand) v. Durable versus non-durable 1. Durables have a more elastic demand 2. Non-durables have a less elastic demand because they cannot be stored for very long 3. If price goes down, people will not necessarily buy a lot more vi. Proportions of income 1. Goods and services that occupy a larger proportion of income tend to have a more elastic demand 2. Same % change in price but not same effect on demand vii. TR = Total expenditure for consumers viii. Demand is inelastic 1. P goes down  QD goes up 2. TR goes down because A > C 3. TR goes down P goes down if demand is inelastic ix. Demand is elastic 1. As P goes down QD goes up 2. TR goes up when P goes down if demand is elastic x. Unitary elastic 1. TR stays the same regardless of prices changes when demand is unit elastic 2. Income elasticity of demand (ɳY) a. (nY) = % change in Quantity Demanded / % change in Income b. nY > 0 : If income goes up so does the quantity demanded (QD) of that good (Normal good) c. nY < 0 : If income goes up QD of the good goes down (inferior good) d. Normal Goods i. 1 < nY< infinity : Luxury good (normal good) ii. 0 < nY < 1 : Necessity iii. nY < 0 : Inferior good 3. Cross-Price elasticity of demand (nxY) a. nxY= %change in QDx / %change in Py 4. Price elasticity of supply nS a. nS = %change in QS / %change in P Chapter 6 : - TerConsumer Surplus o Willingness to pay (WTP): Maximum amount that a consumer will pay for a good. Reflected by the demand curve / demand schedule o Law of diminishing returns. WTP for additional unit continues to go down as a consumer acquires more of a good. o Market Price (Price @ $1.40):  WTP($) – Price= Net Gain  $2.00 - $1.40 = $0.60  $1.80 – $1.40 = $0.40  $1.40 - $1.40 = $0.00 o Learn to Graph - Producer surplus o Cost = the value of everything a producer must give up to produce a good (reflected on supply curve) o It is increasingly more expensive to produce additional unites since more of scarce resources in the economy are to be devoted to the production of a certain good. o The higher the quantity of a certain good that is to be produced, the higher the cost of production of that good. o Occurs when the Quantity being produced increases from Q1 to Q2 o - Graphically speaking o C.S. = the area between demand curve and market price o P.S. = the area between market price and supply curve  S = represents production cost  D = represents WTP  Efficiency achieved at Pe and Qe - Social Welfare: o Goal of government is to maximize total surplus in the economy o Total surplus = social welfare = C.S. + P.S.  C.S. = WTP – P (where P is market price)  P.S. = P – C (where C is the cost of production)  Social Welfare = WTP – C Chapter 5 - Price Controls o Price Ceiling: Legal Maximum on the price at which a good can be sold o
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