CHAPTER 3 NOTES MODULE 3
Lecture Notes
LECTURE NOTES
I.
Introduction
A.
Learning objectives
–
In this chapter students will learn:
1.
About price elasticity of demand and how it can be applied.
2.
The usefulness of the total revenue test for price elasticity of demand.
3.
About price elasticity of supply and how it can be applied.
4.
About cross elasticity of demand and income elasticity of demand.
5.
About
consumer
surplus,
producer
surplus,
and
efficiency
(deadweight) loss.
B.
Elasticity of demand measures how much the quantity demanded changes
with a given change in price of the item, change in consumers’ income, or
change in price of related product.
C.
Price elasticity is a concept that also relates to supply.
D. The chapter explores both elasticity of supply and demand and
applications of the concept.
II.
Price Elasticity of Demand
A. Law of demand tells us that consumers will respond to a price decrease by
buying more of a product (other things remaining constant), but it does not tell
us how much more.
B.
The degree of responsiveness or sensitivity of consumers to a change in
price is measured by the concept of price elasticity of demand.
1.
If consumers are relatively responsive to price changes, demand is said
to be elastic.
2.
If consumers are relatively unresponsive to price changes, demand is
said to be inelastic.
3.
Note that with both elastic and inelastic demand, consumers behave
according to the law of demand; that is, they are responsive to price
changes. The terms
elastic or inelastic describe the degree of
responsiveness.
A precise definition of what we mean by “responsive” or
“unresponsive” follows.
4.
Consider This … A Bit of a Stretch
The Ace bandage stretches a lot when force is applied (elastic); the
rubber tiedown (not to be confused with a rubber band) moves stretches
little when force is applied (inelastic).
C.
Price elasticity coefficient and formula:
Quantitative measure of elasticity, Ed = percentage change in quantity/
percentage change in price.
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1.
Using two pricequantity combinations of a demand schedule,
calculate the percentage change in quantity by dividing the absolute
change in quantity by one of the two original quantities. Then calculate the
percentage change in price by dividing the absolute change in price by one
of the two original prices.
2.
Estimate the elasticity of this region of the demand schedule by
comparing the percentage change in quantity and the percentage change in
price. Do not use the ratio formula at this time. Emphasize that it is the
two percentage changes that are being compared when determining
elasticity.
3.
Show that if the other original quantity and price were used as the
denominator that the percentage changes would be different. Explain that
a way to deal with this problem is to use the average of the two quantities
and the average of the two prices.
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 Spring '11
 wencel
 Microeconomics, Price Elasticity, Supply And Demand, producer

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