Economics Chapter 4 Notes
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Economics Chapter 4 Notes

Course Number: RSM 100, Fall 2010

College/University: University of Toronto

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EconomicsChapter4Notes 4.1PriceElasticityofDemand Elastic:whenquantitydemandedisquiteresponsivetochangesinprice, Inelastic:whenquantitydemandedisrelativelyunresponsivetochangesinprice. Price Elasticity of Demand:ameasureoftheresponsivenessofquantitydemandedtoachangeinthecommoditysown price. o N=(percentagechangeinquantitydemanded)/(percentagechangeinprice) **percent changes are based on averages (New...

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Elasticity EconomicsChapter4Notes 4.1PriceElasticityofDemand Elastic:whenquantitydemandedisquiteresponsivetochangesinprice, Inelastic:whenquantitydemandedisrelativelyunresponsivetochangesinprice. Price of Demand:ameasureoftheresponsivenessofquantitydemandedtoachangeinthecommoditysown price. o N=(percentagechangeinquantitydemanded)/(percentagechangeinprice) **percent changes are based on averages (New Original) / (Average) Themoreresponsivequantitydemanded,thelargetheNvalue. Elasticityis0whenapricechangeleadstonochangeinquantitydemanded. o VerticalDemandCurve Elasticityisverylargewhenthedemandcurveisalmostorishorizontal. Elastic Demand: whenthepercentagechangeinquantityisgreaterthanthepercentagechangeinprice o Elasticity GREATER than 1 Unit Elastic:percentagechangeinquantitydemandedisexactlyequaltothepercentagechangeinprice. Theavailabilityofsubstitutesinfluenceselasticity. Inelastic Demand:whenthepercentagechangeinquantitydemandedislessthanthepercentagechangeinprice o Elasticity is LESS than 1 Anegativelyslopedlineardemandcurvedoesnothaveconstantelasticity Alinerdemandcurvehasconstantelasticityonlywhenitsverticalorhorizontal. Productsdefinedmorebroadlywillbeinfluencedlessbyavailabilityofsubstitutes. o Lesssubstitutesofalltransportation o MoresubstitutesforDietPepsicola. Products with close substitutes tend to have elastic demands Products with no close substitutes tend to have inelastic demands Narrowly defined products have more elastic demands than do more broadly defined products. Theresponsetoapricechange,andthusthemeasurepriceelasticityofdemand,willtendtobegreaterthelongerthetime span. Thelongrundemandforaproductismoreelasticthantheshortrundemand. ElasticityandTotalExpenditure TotalExpenditure=(Price)x(Quantity) Changeinexpendituredependsontherelativechangesinthepriceandquantity. 4.2PriceElasticityofSupply Price of Elasticity Supply:themeasurementoftheresponsivenessofquantitysuppliedtoachangeintheproducts price. VerticalSupplyCurve:quantitysupplieddoesnotchangeaspricechanges. Supplyismuchmoreelasticoverthelongrun. HorizontalSupplyCurve:aninfiniteelasticityofsupply 4.3AnImportantExampleWhereElasticityMatters Excise Tax:ataxonthesaleofparticularcommodity. o Tobacco,Liquor,Gasoline Tax Incidence:thelocationoftheburdenofataxthatis,theidentityoftheultimatebearerofthetax. o Distributedbetweenconsumersandsellers. When demand is inelastic relative to supply, consumers bear most of the burden of excise taxes. When supply is inelastic relative to demand, producers bear most of the burden. 4.4OtherDemandElasticities Income elasticity of demand ( ): ameasureoftheresponsivenessofquantitydemandedtoachangeinincome. o =(percentagechangeinquantitydemanded)/(percentagechangeinincome) Necessities:productsforwhichtheincomeelasticityofdemandispositivebutlessthan1. Luxuries: productsforwhichtheincomeelasticityofdemandispositiveandgreaterthan1. The more necessary an item is in the consumption pattern of consumers, the lower is its income elasticity. Inferiorgoodshavenegativeincomeelasticity. CrossElasticityofDemand A measure of the responsiveness of the quantity of one commodity demanded to changes in the price of another commodity. o =(%changeinquantitydemandedofX)/(%changeinquantitydemandedofY) Complementaryproductshavenegativecrosselasticities. Substituteproductshavepositiveelasticities.

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