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

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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 ...
View Full Document

Ask a homework question - tutors are online