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Micro.Week4.2007

# Micro.Week4.2007 - 4/1 Review last week First we defined...

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4/1 Review last week: First we defined ELASTICITY elasticity = % change in Q % change in P Now % change in Q = (/ Q/Q) x 100% And % change in P = (/ P/P) x 100% So elasticity = / Q/Q x 100% = / Q/Q = / Q P / P/P x 100% / P/P / P Q Elasticity of demand elasticity = - % change in Q = -L Q P of demand % change in P L P Q note minus sign is sometimes left off note that slope of demand curve = / P// Q inverse of slope of demand curve = / Q// P So elasticity is “like” the inverse of the slope To compute demand elasticity = / (dQ/Q)/(dP/P) = / (dQ/dP)(P/Q) = (positive inverse of slope) x (P/Q)

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4/2 So, what does it mean when we say that elasticity is larger in long run : we are saying that slope of demand is flatter (larger means flatter) eg. P = 20 - 2Q at Q = 5 Elasticity of demand = -(dQ/dP)(P/Q) = 1 P = 15 - Q at Q = 5 Elasticity of demand = 2 P = 30 - 4Q at Q = 5 Elasticity of demand = 0.5 Diagram: All through same point (Q = 5, P = 10)
4/3 Elasticity of supply ES = elasticity = % change in Q of supply % change in P note no minus sign To compute ES = (dQ/Q)/(dP/P) = (dQ/dP)(P/Q) = (positive inverse of slope) x (P/Q) eg. supply curve P = 2Q + 6 at point Q = 2, P = 10 To compute ES = (dQ/Q)/(dP/P) = (dQ/dP)(P/Q) = (positive inverse of slope) x (P/Q) = 0.5 x 5 = 2.5 So now return to rent controls - when we say elasticity is bigger in long run, we mean both curves are “flatter”, so excess demand is larger

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