ECON10010 lectures 10 and 11: long run and short run production

Long and short run definition

Price elasticity of demand varies according to the length of time in which consumers can adjust their spending patterns when prices change

PED in short run vs long run

lower in the short run (more time to substitute goods)

Short run

period after price change but before quantity adjustment has time to occur

Long run

period needed for complete adjustment to a price change

movement vs shift

movement occurs due to change in price level of goods, shift occurs due to change in other variables (e.g consumer income, substitute goods)

cross price elasticity

Effect on QD of good i when the price of good j changes (% changes used)

Positive cross price elasticity

for substitute goods (increase in price of good i raises demand for good j)

Negative cross price elasticity

for complement goods (increase in price of good i lowers demand for good j)

cross price elasticity is zero

Independent/unrelated goods

cross price elasticity formula (for good i with respect to j)

% change in QD of i

---

% change in PD of j

Budget share of a good

fraction of total consumer spending for which it accounts

Budget share example

Real consumer spending (and incomes) rose during 1997–2005. Even though real spending on food and drink increased, its budget share fell. Spending on recreation and cultural goods rose so much that its budget share increased substantially

Budget share formula

P x QD

---

total consumer spending or income

Income elasticity of demand formula

% change in QD

---

% change in consumer income

Income elasticity of demand

measures how far the demand curve shifts horizontally (left or right) when incomes change

the larger the income elasticity

the larger the shift left or right is

positive income elasticity

shift right

negative income elasticity

shift left

normal goods

increase in income = increase in demand

inferior goods

decrease in income = decrease in demand

inferior goods have

negative income elasticity of demand

necessity goods have

income elasticity of demand less than or equal to 1