Class notes
Econ 2100 Chapter 5 Lecture Notes
- Course
- ECON 2100
- Institution
- Kennesaw State University
This is a comprehensive and detailed note on Chapter 5 Elasticity and Its Application. *Essential!!
[Show more]
Content preview
Chapter 5: Elasticity and It's ApplicationSunday, February 14, 2021 10:16 PM
• Tax on gasoline specifically, effects quantity demanded more in the long-run than in the short-run
○ Long-run: drive less and get more fuel efficient cars
• Elasticity
○ Measures how much buyers and sellers respond to changes in market conditions (magnitude
of effects)
Price elasticity of demand ----------------------------------------------------------------
○ Measure of how much quantity demanded responds to change in price
○ Elastic demand
Quantity demanded responds A LOT to change in price
EX.s
□ Beef
□ Peanut butter
□ Restaurant meals
□ Cherries
□ Mountain dew
○ Inelastic demand
Quantity demanded responds A LITTLE to change in price
EX.s
□ Housing
□ Rice
□ Cigarettes
□ Healthcare
□ Eggs
• Influences
○ Availability of Close Substitutes
If available
□ Good has elastic demand
If not available
□ Good has inelastic demand
○ Necessities v.s. Luxuries (based on person's preferences)
Luxuries
□ Good has elastic demand
Necessities
□ Good has inelastic demand
○ Definition of the Market
Narrowly defined markets
□ Good has elastic demand
Bc can find substitutes
◊ EX. Vanilla ice cream market
Broadly defined markets
□ Good has inelastic demand
Bc can't find substitutes
◊ EX. Food market
○ Time horizon
Long time horizon
□ Good has elastic demand (usually)
EX. Tax on gas
Short time horizon
, □ Good has inelastic demand (relatively, and usually)
EX. Tax on gas
○ Computation - normal method
Use when given the percent changes directly, without having to get Point A and Point B
and calculate the changes.
□ Ignore all negative signs that you would usually use for an increase or decrease
(change) in each value. This calc uses absolute value.
EX.
□ Result of 2 for price elasticity of demand
Change in QD (num.) is twice as large as change in P (denom.)
◊ This number is above 1, so good is elastic, and has more responsiveness to
change in price
○ Computation - Midpoint method
Use when having to get Point A and Point B and calculate the changes, bc going from A to
B gives different result (flipped) than going from B to A when using the normal method.
Computes price elasticity of demand by dividing change by the midpoint of the initial and
final levels
□ Left side is computing change, right side is computing midpoint
□ QD change on top and P change on bottom
□ Doesn't make top or bottom into percent's bc not needed
□ Ignore all negative sign at the end, uses absolute value
• Interpreting price elasticity of demand (or supply) values
○ ELASTIC
Greater than 1
Flatter demand curve at a given point
□ quantity demanded moves proportionately MORE than the price
○ INELASTIC
Less than 1
Steeper demand curve at a given point
□ quantity demanded moves proportionately LESS than the price
○ UNIT ELASTICITY
Exactly 1
In the middle of being steep and flat at a given point
□ Percentage change in QD is the same as percentage change in P
○ PERFECTLY INELASTIC
Exactly 0
Vertical line graph
□ QD does not respond/change regardless of change in price
○ PERFECTLY ELASTIC
Approaches Infinity
Horizontal line graph
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller anyiamgeorge19. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $12.89. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
78252 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now