EC 201 9-22-08

# EC 201 9-22-08 - o =(∆Qd/Qd = prop ∆ Qd(∆P/P= prop...

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EC 201 9-22-08 Treasury will buy ~\$700 billion of bad assets Where does that come from? o 1. Fed. Print money →inflation o 2. Treasury bills (govt. debt) o But Americans don’t save Who will buy debt? China Japan UK o 3. Higher taxes o Less spending on other Elasticity o Shape of D curve makes a difference o How to measure responsiveness of Qd to changes in P? o Candidate: slop of D o Problem: slope depends on units o Europe: €/ liter o USA: \$ / gallon o Need unit- free measure o Use percentages/ proportions o Economist’s measure of responsiveness o Elasticity = % ∆ Qd / % ∆ P Own-price elast. Of D

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o Generally elast. = %∆response/ %∆stimulus o Own-price elast. Of D for gasoline o P ↑ 50% → Qd↓ 5% E= % ∆ Qd / % ∆ P = 5/50=0.1 Rule #1: drop minus sign Use absolute value Percentage Version : e = %∆ Qd/% ∆P Percentage = (proportion) * 100 Proportional Version: Proportional ∆ Qd / Proportional ∆ P =
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Unformatted text preview: o =(∆Qd/Qd = prop. ∆ Qd ) / (∆P/P= prop. ∆P Rule # 2: for reference levels of P + Qd, use average (midpoint) P ↑ from 90 cents to \$1.10 From 90 cents to 110 cents →Qd↓ from 1.05 million to 0.95 milion E=(∆Qd/ Qd) /(∆P/P) = (0.1/1.0)/(20/100)=(0.1/0.2) = 0.5 P ↑ from \$ 1.10 to \$1.30 → Qd ↓ from 0.95 M to 0.85 M Straight line →along straight-line D curve, elast. not constant E= (1/9)/(1/6)=(6/9)=2/3 o E= % ∆Qd/%∆P=0 o “perfectly inelastic” o %∆Qd < %∆P o E=(%∆Qd)/(%∆P)<1 o 0<e<1 o “inelastic” but not perfectly o % ∆Qd/%∆P=1 “unit elastic” o Responsive %∆Qd>%∆P o “elastic” o A small firm with small share of market o E=%∆Qd/%∆P →∞ o “perfectly elastic”...
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## This note was uploaded on 04/19/2011 for the course EC 201 taught by Professor Ballard during the Fall '08 term at University of Michigan.

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EC 201 9-22-08 - o =(∆Qd/Qd = prop ∆ Qd(∆P/P= prop...

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