MICROECONOMICS – ECO 2023

Chapter 5 Outline

 

Chapter 5 – Elasticity (or Why You Should Be VERY AFRAID)

 

I.                    Defining and Measuring Elasticity

A.     Calculating all types of elasticity will use the same “midpoint method”

1.      subtract to get numeric change

2.      calculate midpoint

3.      calculate percentage change

4.      calculate elasticity (divide percentage changes)

B.     The type of elasticity will determine what goes in numerator and what goes in denominator

II.                 Price Elasticity of Demand

A.     Measures response in QD to a change in price (% changes!!)

B.     Most commonly used measure of elasticity

C.     Use % changes so we can compare different units of measurement

D.     Example problems

III.               Interpreting the Price Elasticity of Demand

A.     inelastic (or unresponsive to change in price)

B.     elastic (or responsive to change in price)

C.     unit-elastic (or proportionally responsive to change in price)

D.     Extremes of price elasticity of demand

1.      perfectly inelastic demand

2.      perfectly elastic demand

IV.              Relating Price Elasticity of Demand to Total Revenue

A.     What is total revenue? What does it measure?

B.     How is total revenue affected by elasticity of demand?

V.                 Price Elasticity Along the Demand Curve (changing throughout) – p. 119

A.     What factors determine elasticity of demand?

1.      substitutes – ex. pizza

2.      necessity of good

3.      time (long term vs. short term) – ex. first class stamps

VI.              Other Demand Elasticities

A.     Cross-Price Elasticity of Demand

1.      calculate % change in QD of good A divided by % change price of good B

2.      shows relationship between two goods – depends on the sign

a.       complements

b.      substitutes

B.     Income Elasticity of Demand

1.      calculate % change in QD of good divided by % change in income

2.      shows relationship between two goods – depends on the sign

a.       normal goods

b.      inferior goods

 

VII.            The Price Elasticity of Supply

A.     Measures response of QS to a change in price (% changes!!)

1.      calculate % change in QS divided by % change in price

2.      same measures of elastic, inelastic, and unit-elastic

a.       perfectly inelastic supply

b.      perfectly elastic supply

c.       unit-elastic supply

3.      What factors determine the price elasticity of supply?

a.       availability of inputs

b.      time (long term vs short term)

VIII.         Using Elasticity: The Incidence of an Excise Tax

  1. Whichever side’s elasticity is lower ( less responsive to price) will pay more of the tax

1.      when an excise tax is paid mainly by consumers (example with perfectly inelastic demand)

2.      when an excise tax is paid mainly by producers (example with perfectly inelastic supply)

 

 

Vocabulary words are located on p. 105 of your text – good summary chart of all types of elasticity on p. 127 of your text