{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Lecture2

# Lecture2 - LECTURE#2 Income Elasticity of Demand(eI...

This preview shows pages 1–6. Sign up to view the full content.

LECTURE #2: Income Elasticity of Demand (e I ) Definition: e I = % in Q = δ Q · _I_ % in I δ I Q in I I If e I > 0 then we have a normal good . e I > 1 means a luxury good. e < 1 means a necessity e I < 1 means a necessity. If e I < 0 then we have an inferior good . Engel Curves : An Engel curve relates changes in income to changes in quantity demanded. For example, for a normal good, as income increases so too does quantity demanded. On the other hand, for an inferior good, as income increases the quantity demanded of the good decreases.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Engel Law states that, as income increases, the percentage of income spent on t i f d d li I l it h b i i ll b d th t certain foods declines. In general, it has been empirically observed that as income rises, some goods that were normal become inferior.
Cross Price Elasticity of Demand (e XY ) Definition: e XY = % in Q X = δ Q X · _P Y _ % in P Y δ P Y Q X If e XY > 0, then good X and good Y are substitutes. e XY < 0, then good X and good Y are complements. Example: 0, then good X and good Y are complements. e XY = 0, then good X and good Y are unrelated. Substitute: Water skis (Y)… P skis Q boards , so… e XY = % in Q boards = + = + Wakeboards (X) % in P skis + Complement: Life Jackets (Y)… P jacket Q boards , so… e XY = % in Q boards = _- _ = - % in P jackets +

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
The magnitude of the cross price elasticity measures the degree of substitutability (+) or complementarity (-). This is often quite useful when conducting market studies or when analyzing certain policy effects analyzing certain policy effects. Derivation of Total Revenue (TR) and Marginal Revenue (MR) At A the price is so high that nothing is sold (TR = 0). At B, the price is At A the price is so high that nothing is sold (TR 0). At B, the price is zero so TR = 0. (Total Revenue = price x quantity OR TR = PQ) Total revenue at any price-quantity combination can be represented as a rectangle under the demand curve. This reaches a maximum (in terms of area) at the midpoint of a straight-line demand curve terms of area) at the midpoint of a straight line demand curve. The total revenue curve thus rises from zero to some maximum (at the midpoint of the straight-line demand curve) and then returns back to zero. Marginal revenue (MR) is the change in Total revenue as a result of a change in the quantity sold. MR = TR / Q = the slope of the TR curve MR = TR / Q = the slope of the TR curve. As quantity increases, the slope of the TR curve (MR) gets flatter (i.e. MR is falling) until it flattens completely where TR is maximized and then turns downward sloping (i.e. MR becomes negative). Thus, MR crosses the Q-axis where TR is maximized.
These are the relationships that we have developed so far… P TR = 0 TR i i i d TR is maximized. MR is zero. e p is one. TR 0 Q TR = 0 f In this graph, we are representing the case where price is falling and quantity demanded is rising.

This preview has intentionally blurred sections. Sign up to view the full version.

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

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern