chp3 - ECON 300B Lei Intermediate Microeconomics Winter...

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Unformatted text preview: ECON 300B Lei Intermediate Microeconomics Winter 2011 1 Chapter 3 Chapter 3 Chapter 3 Chapter 3 - Applying the Supply Applying the Supply Applying the Supply Applying the Supply-and and and and-Demand Model Demand Model Demand Model Demand Model Qualitative change Vs. quantitative change Qualitative change Vs. quantitative change Qualitative change Vs. quantitative change Qualitative change Vs. quantitative change When the supply curve shifts right, the qualitative change of the equilibrium quantity is unambiguous - an increase. However, the quantitative change in the quantity depends on the slopes of supply and demand curves around the equilibrium point. In the graphs below, it is shown that the steeper the demand is, the _____________________________________________ is the change in the quantity. Elasticity Elasticity Elasticity Elasticity ~ the percentage change in a variable in response to a given percentage change in another variable Recall that for any variable x, percentage change in it is %g = G g g g Thus, elasticity of a variable x in response to another variable y is %g/% , which is a _________________________________________ measure. There are 4 elasticities we focus on in this chapter. They are all defined to be the percentage change in a quantity in response to a percentage change in another variable 1 : i. Price elasticity of demand i. Price elasticity of demand i. Price elasticity of demand i. Price elasticity of demand: = % % = = as 0 Note: < 0 by the law of demand 1 Notice that I use partial derivative here so I do not have to repeat the words holding other variables constant. The textbook defines an elasticity of x in response to y as holding all else constant, = . = 0 ECON 300B Lei Intermediate Microeconomics Winter 2011 2 ii. Income elasticity of demand ii. Income elasticity of demand ii. Income elasticity of demand ii. Income elasticity of demand: g = %G % = = G G G G as 0 Note: g > < 0 for normal ood inferior ood iii. Cross price elasticity of demand iii. Cross price elasticity of demand iii. Cross price elasticity of demand iii. Cross price elasticity of demand: %G % = = G G G G as 0 Note: %G % > < 0 for substitutes complements iv. Price elasticity of supply iv. Price elasticity of supply iv. Price elasticity of supply iv. Price elasticity of supply: = %G % = = G G G G as 0 Note: > = < Degree of sensitivity Degree of sensitivity Degree of sensitivity Degree of sensitivity...
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chp3 - ECON 300B Lei Intermediate Microeconomics Winter...

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