Econ notes unit 2 1-2

Elasticity

measure of responsiveness of quantity demanded to a change in price

law of demand

price increases Qd decreases

responsiveness

measuring how strong/ responsive quantity is to changing p

elasticity relevance

business owner- should price of g/s be raised or lowered

govt- should taxes on a g/s be raised or lowered

Elasticity equation

% change in Qd / % change in P

Elastic ranges for interpretation

Elastic = Ed > 1

Unit elastic = Ed = 1

Inelastic = Ed < 1

4 influences on price elasticity and demand

availability of close subsitute

luxuries vs necessities

proportion of income spent on g/s

time to adjust

ALPT

Availibility of close substitutes

if g/s is very swichable, pick a similar g/s when the original product price rises = elastic

if not switchable, buy less when price increases but usually inelastic

luxuries vs necessities

luxury goods are elastic

necessities are inelastic, will still buy even if price goes up

proportion of income spent on g/s

the question of price change in relation to income

price increase large relative to income= elastic

price increase small relative to income = inelastic

poor effected more then rich

ex. fixed income 75k, car 50k increases %25 to 63k, don’t buy car. soda $1 increases 25% to $1.25, still buy.

time to adjust

how does consumer react to price changes

short run and no alternatives= inelastic

long run and more options over time= elastic

ex gas prices increase, stay with gas in the short run but as price increase continues switch from gas to ev 

Total revenue test

price of g/s x quantity of g/s sold

TR = p x q

Assumes producer rationality (they will act based on how to make the most profit)

purpose of total revenue test

determine elasticity of g/s

determine price for max revenue

quantity (selling) effect

if g/s is elastic

dropping price = increases revenue

small % deacrease in P x large % increase in Q = increased TR

inverse also true

continue until TR stops increasing

if g/s is inelastic

income (charging) effect

increases price = increases revenue

large % increase

inverse also true

continue until TR stops increasingse in P x small % decrease in Q = increase TR

Price elasticity of supply

a measure of responsiveness of Quantity supplied to a change in P

Equation- % change in Qs / % change in P

how many g/s should you produce to make max profit

1 influence on price elasticity of supply

time (market prices)

the speed that a producer reacts to a change in P (IE: changing production for more profit)

more elastic over time

2 factors of time (market period)

1. production ability = can you make more of g/s or make it differently?

2. storage ability = cost and ability, inelastic if you can’t store easily (fruit, milk)

Elasticity locations

Overall curved slope

Along curve - elasticity changes as price changes

upper = elastic, lower = inelastic, middle = unit elsastic

use TR expectations regardless of location

Consumer surplus

net gain between what one pays vs what one is willing to pay

utility of purchase (likegetting a deal)

Equation of consumer surplus

max willingness price - market price

results: positive= surplus, negative= no willingness to buy