Chapter 6
Elasticity: The responsiveness of one variable (e.g., quantity demanded or quantity supplied) to a change in another variable (e.g., one of the determinants of demand and/ or supply, such as price, income, and etc.)
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Price elasticity of demand (Ed) is the responsiveness of the quantity demanded (of a good) to a change in (its) price. --- more responsiveness equal more elastic.
Point Elasticity
Ed = Q2-Q1Q1-------P2-P1P1
Arc Elasticity
Ed= Q2-Q1Q2+Q12P2-P1P2+P12
(Increase?????????????),(decrease ?????????????), ( arc ????)
Definition. “ABOSULUTE VALUE OF ELASTIC” If |Eda|>1 at some point (q0,p0), demand is called elastic.
If |Eda|<1 at some point(q0,p0), demand is called inelastic.
If |Eda|=1 at some point(q0,p0), demand is called unit elastic.
If the quantity demanded doesn’t change when the price changes, the price elasticity of demand is zero and the good as a perfectly inelastic demand (The demand curve is vertical.)
If The percentage change in the quantity demanded is infinitely large when the price barely changes, the price elasticity of demand is infinite and the good has a perfectly elastic demand – a horizontal demand curve.
Revenue =price x quantity
The elasticity of demand directly influences revenues when the price of the good change, 1) revenues rise as price rises with inelastic demand curve 2) revenues fall as price rises with elastic demand curves. |Ed|<1 inelastic P and R MOVE TOGETHER.
|Ed|>1 Elastic P and R MOVE OPPOSITE |Ed|=1 unit elastic p MOVES, R STAYS THE SAME.
Tax incidence: if producers pay a larger share, it is said that the incidence of tax falls on producers; If consumers pay a larger share, it is said that the incidence of tax falls on the consumer. When demand is more elastic than supply, buyers pay less of the tax.
When supply is more elastic than demand, sellers pay less of the tax. In other words, Elastic = Escape.
Cross elasticity of demand = percentage change in quantity demanded of a good / percentage change in the price of one of its substitutes of complement.
Income elasticity of demand = percentage changes in quantity demanded / percentage change in income
If income elasticity is>1, normal good, income elastic. Between zero and 1, normal good, income inelastic. Less than zero, inferior good.
Utility(util) is TOTAL UTILITY AND MARGINAL UTILITY. Diminishing marginal utility(????????)is the principle that as the quantity of a good consumed increase, marginal utility declines.
Change in budget: when budget increase, consumption possibilities expand. When budget decrease, consumption possibilities shrink.
Consumer equilibrium=maximizes total utility.
Marginal utility: is the increase in total utility that result from consuming one more unit of good.
Equi-marginal principle: to maximize utility, consumers allocate their incomes among goods so as to equate the marginal utilities per dollar(mu/p) of the expenditure on the last unit of each good purchased. Mu(soda)/Ps
