Chapter 2 Notes

Chapter 2 Notes - o Constant elasticity demand curves Q =...

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Kimberly Zhang Microeconomics Chapter 2 Demand: price of good, price of other goods, income Supply: price of good, price of other goods, wage Durable goods: goods that provide valuable services over a long time; demand for non-durables less elastic in short run when consumers can only partially adapt behavior; demand for durables more elastic in short run because consumers can delay purchase Q = a + bP Price Elasticity of Demand/Supply: (dQ/dP)(P/Q) = bP/(a + bP) o Inelastic demand: -1 < ε < 0 (0 = perfect inelasticity, vertical line) o Unitary elastic demand: ε = -1 o Elastic demand: -∞ < ε < -1 (-∞ = perfect elasticity, horizontal line) o Linear demand curve: Q = a – bP o Inverse demand curve: P = a/b – Q/b (a/b = choke price, Qd = 0) o Elasticity = -bP/Q o From a/b (y intercept) elastic until a/2b (where ε = -1) and inelastic until a (x intercept)
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Unformatted text preview: o Constant elasticity demand curves: Q = aP-b , ε = -b • Total revenue = PQ • Income Elasticity of Demand: (dQ/dI)(I/Q) • Cross-Price Elasticity of Demand: (dQ i /dP j )(P j /Q i ) o If ε > 0, higher price of good j increases demand for good i (demand substitutes, like Coke and Pepsi) o If ε < 0, higher price of good j decreases demand for good i (demand complements, like cereal and milk) • Greater elasticity in short run than in long run • 1 st derivative: marginal impact • 2 nd derivative < 0: marginal impact is falling • f ii : shows how marginal influence of x i on y changes as the value of x i increases o negative value for f ii indicates diminishing marginal effectiveness o f ij indicates marginal effectiveness of x i changes as x j increases...
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