# Notes-Wk4 - Section Notes Elasticity& Marginal Beneﬁt...

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Unformatted text preview: Section Notes Elasticity & Marginal Beneﬁt/ Cost Analysis January 31 & February 1, 2011 1 Elasticity • Perfectly elastic demand curve: a 1% increase in price ⇒ quantity demanded to shrink to zero(Very responsive to price changes) • Perfectly inelastic demand curve: a 1% increase in price ⇒ no change in quantity demanded (Nonresponsive to price changes) • Midpoint formula for elasticity: εD = ￿ ￿ Elasticity represents the responsiveness of demand or supply to changes in price. %∆Q =￿ %∆P Q −Q “ Qf inal +Q initial ” f inal 2 initial P −P “ Pf inal +P initial ” f inal 2 initial ￿ (1) Note: This formula ﬁnds the elasticity at the price that is half way between Pf inal and Pinitial . – Ex: If Pf inal = \$5 and Pinitial = \$3 then when we solve (1) above, we are ﬁnding the elasticity of demand at P = \$4. • Question 11, Chapter 5 • Practice Exam Questions: #1, #2 1 2 Marginal Beneﬁt & Cost Analysis • Marginal Beneﬁt: the additional beneﬁt to the consumer of consuming the next unit • Marginal Cost: the additional cost to the producer of producing the next unit • At a speciﬁc quantity, what happens if: – M B > M C ⇒ the speciﬁc unit produced/ consumed yields more beneﬁt than it cost to produce – M B < M C ⇒ the speciﬁc unit produced/ consumed cost more to produce than the beneﬁt it creates – M B = M C ⇒ the speciﬁc unit produced/ consumed yields exactly the same amount of beneﬁt as it cost to produce ∗ no incentive to increase production (⇒ M C > M B ) ∗ no incentive to decrease production (⇒ M B > M C ) ∗ ⇒ equilibrium • Note: in a competitive market, the price is either the marginal beneﬁt or the marginal cost depending upon whose perspective we are viewing it from: – Consumer: the price is the consumer’s marginal cost of purchasing each additional unit – Producer: the price is the producer’s marginal beneﬁt of producing & selling another unit. • Practice Exam Questions: #3, #4, #5 • Questions 6 from Chapter 6 Rice 1 2 3 4 5 6 7 Amy’s MB 5 5 5 4 3 0 0 Ben’s MB 9 9 5 4 2 0 0 Charlie’s MB 5 4 4 2 0 0 0 Danielle’s MB 10 10 10 10 8 5 1 P (\$) 0 1 2 3 4 5 6 7 8 9 10 QD 2 Rice 1 2 3 4 5 6 7 Ed’s MC 4 4 5 6 8 16 26 Frank’s MC 2 2 2 4 5 5 12 Grant’s MC 6 6 8 10 12 16 22 Herb’s MC 2 3 4 5 8 15 24 P (\$) 0 1 2 3 4 5 6 7 8 9 10 QS 3 ...
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## This note was uploaded on 02/21/2011 for the course ECONOMICS 101 taught by Professor Gerson during the Winter '11 term at University of Michigan.

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