Chapter06 - mcc75691_ch06_112-133.indd Page 112 8/22/08...

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PART TWO Microeconomics of Product Markets 6 ELASTICITY, CONSUMER SURPLUS, AND PRODUCER SURPLUS 7 CONSUMER BEHAVIOR 8 THE COSTS OF PRODUCTION 9 PURE COMPETITION 10 PURE MONOPOLY 11 MONOPOLISTIC COMPETITION AND OLIGOPOLY 11W TECHNOLOGY, R&D, AND EFFICIENCY
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6 IN THIS CHAPTER YOU WILL LEARN: 1 About price elasticity of demand and how it can be applied. 2 The usefulness of the total revenue test for price elasticity of demand. 3 About price elasticity of supply and how it can be applied. 4 About cross elasticity of demand and income elasticity of demand. 5 About consumer surplus, producer surplus, and effi ciency losses. Today’s market economies rely mainly on the activities of consumers, businesses, and resource suppliers to allocate resources efficiently. Those activities and their outcomes are the subject of microeconomics, to which we now turn. In this chapter we extend Chapter 3’s discussion of demand and supply by explaining significant ideas that help us answer such questions as: Why do buyers of some products (for example, ocean cruises) respond to price increases by substantially reducing their purchases while buyers of other products (say, gasoline) respond by only slightly cutting back their purchases? Why do higher market prices for some products (for example, chicken) cause producers to greatly increase their output while price rises for other products (say, gold) cause only limited increases in output? Why does the demand for some prod- ucts (for example, books) rise a great deal when household income increases while the demand for other ±Elasticity,±Consumer±Surplus,± and Producer Surplus 113
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Price Elasticity of Demand The law of demand tells us that, other things equal, consum- ers will buy more of a product when its price declines and less when its price increases. But how much more or less will they buy? The amount varies from product to product and over different price ranges for the same product. It also may vary over time. And such variations matter. For example, a firm contemplating a price hike will want to know how con- sumers will respond. If they remain highly loyal and con- tinue to buy, the firm’s revenue will rise. But if consumers defect en masse to other sellers or other products, the firm’s revenue will tumble. The responsiveness (or sensitivity) of consumers to a price change is measured by a product’s price elastic- ity of demand . For some products—for example, restau- rant meals—consumers are highly responsive to price changes. Modest price changes cause very large changes in the quantity purchased. Economists say that the demand for such products is relatively elastic or simply elastic. For other products—for example, toothpaste— consumers pay much less attention to price changes.
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This note was uploaded on 10/06/2010 for the course ECO 2013 taught by Professor Haroldj.vanboven during the Fall '09 term at Edison State College.

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Chapter06 - mcc75691_ch06_112-133.indd Page 112 8/22/08...

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