Wednesday, September 20, 2006

Class Handout for Elasticities

Lecture V(Based on Chapter 7 in the textbook).

I) Price Elasticity of Demand
a. Formula:
(%change in quantity demand of Product X)/(%change in price of product x)
b. Why use percentage changes rather than just raw units?
c. Elastic demand (graph to show how demand curve looks
d. Inelastic demand (graph to show how demand curve looks
e. Unit elasticity
f. Extreme cases of perfect elasticity and inelasticity .
g. Midpoint Formula:
(Change in quantity)/(sum of quantities/2) / (chance in price)/(sum of prices/2)

II) Total Revenue test
a. Effect on revenue of on lowering price level for
i. Elastic demand
ii. Inelastic demand

III) What determines Price elasticity
a. Substitutability
b. Proportion of income
c. Luxuries vs Necessities
d. Time

IV) Price elasticity of Supply
a. Formula: same as above except with supply instead of demand
b. Short run vs long run
c. Importance of Time in shape of supply curve.

V) Cross elasticity of Demand.
a. What if you want to measure how much extra hamburgers you buy when the price of hot dogs goes up?
b. (% change in q demanded of X)/(%change in price of product Y).
c. Substitute goods X >0
d. Complementary goods X<0
e. Independent goods X at or near 0.

VI) Income elasticity of Demand.
a. How much extra or less hamburgers will you buy if your income changes
b. % change in q demanded/% change in income).
c. Normal goods.
d. Inferior goods