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Unformatted text preview: ECON1110 TA Section 5 Professor Jennifer Wissink TA Jingxian Zheng Feb 19, 2009 1 Concepts Review 1. Elasticity: general form: elasticity of A w.r.t. B = % 4 A % 4 B free unit measure specific forms: own-price elasticity of demand D Q,P Q = % 4 Q D % 4 P Q < cross-price elasticity of demand D A,P B = % 4 A D % 4 P B < 0 if complement and > 0 if substitute income elasticity of demand D Q,I = % 4 Q D % 4 I > 0 if normal good and < 0 if inferior good price elasticity of supply S Q,P Q = % 4 Q S % 4 P Q > ... 2. Estimation of elasticity (e.g. own-price elasticity of demand): D Q,P Q = % 4 Q D % 4 P Q = 4 Q D 4 P Q P Q = 1 slope D P Q = dQ D dP Q P Q Note:(i) In midpoint formula, P Q comes from the midpoint ( P,Q ) = ( P 1 + P 2 2 , Q 1 + Q 2 2 ); in text- books traditional formula, P Q = P 1 Q 1 ; otherwise, the point will be specified in the question. (ii) slope D is the slope of the demand curve, dQ D dP Q is the coefficient of P in the demand equation. Elasticity varies along the demand curve (See graph 1) Elasticity and Total Expenditure/Revenue (See graph 2) TE = Q P , when the point moving along the demand curve, P and Q go to opposite directions. so | D | determines the change of TE. 2 Examples 1. Suppose the government sets a minimum wage above the equilibrium wage....
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