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Econ Notes new - Econ Notes#2 Consumer theory part 2 The...

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Econ Notes #2 Consumer theory part 2: The law of demand says that the marginal value of any good falls as the quantity of these good increases relative to other goods. This law applies to money also. If one unit of some good, x, has a price of US$ 45, then the price of US$45 is one unit of x. The price of US$1 is 1/45 th of a unit of x. Suppose that the supply of this good increased and the dollar-price fell to $30. The price of a dollar, in terms of this particular good, increases to 1/30 th of a unit. The price-elasticity of demand measures the responsiveness in quantity demanded to changes in price. An individual who is more (less) responsive to a given change in price is said to be more (less) elastic. Price-elasticity of demand e= % change in quantity of x/ %change in price of x What determines the responsiveness of an individual’s choice of quantity demanded to a change in price? - The availability of close substitutes. - The fraction of income spent on the good. - The unit of time: with the passage of time, the response to a given change in price becomes absolutely greater. (This is sometimes referred to as the 2
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