Midterm 1

Loosely speaking it measures sellers price

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- Loosely speaking, it measures sellers price-sensitivity. - Again, use the midpoint method to compute the percentage changes.

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The Variety of the Supply Curve - The slope of the supply curve is closely related to price elasticity of supply. - RULE: The flatter the curve, the bigger the elasticity. The steeper the curve, the smaller the elasticity. - There are five different classifications... 1. Perfectly inelastic (One extreme) 2. Inelastic 3. Unit elastic
4. Elastic 5. Perfectly elastic (the other extreme) The Determinants of Supply

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- The more easily sellers can change the quantity they produce, the greater the price elasticity of supply. - E.g. Supply of beachfront property is harder to vary and thus less elastic than supply of new cars. - For many goods, price elasticity of supply is greater in the long run than in the short run, because firms can build new factories, or new firms may be able to enter the market. OTHER ELASTICITIES Income elasticity of demand: Measures the response of quantity demanded to a change in consumer income. -Recall from Chapter 4: An increase in income causes an increase in demand for a normal good. -Hence, for normal goods, income elasticity > 0. However, it must be notes that there are two types of normal goods. 1. If the Income elasticity is bigger than 0 but smaller than one than we called this a necessity. 0 < Income elasticity < 1 = Necessity 2. If the Income elasticity is bigger than one then we call this type of good a luxury good.
Income elasticity > 1 = Luxury Good - For inferior goods, income elasticity < 0 Cross elasticity of demand: Measures the response of demand for one good to changes in the price of another good. - For substitutes, cross price elasticity > 0 (E.g, an increase in price of beef causes an increase in demand for chicken). - For complements, cross price elasticity < 0 (E.g. an increase in price of computers causes a decrease in demand for software). NOTE: Total Revenue = Price x Quantity *Therefore, if a question tells you the change in revenue and the change in price then you can work out the change in quantity by using the Total revenue formula. CHAPTER SIX: Supply, Demand and Govt. Policies Government Policies that Alter the Private Market Outcome- Price Controls and Taxes a) PRICE CONTROLS: 1. Price ceiling: A legal maximum on the price of a good or service. Example: Rent Control - A price ceiling above the equilibrium price is not binding. Therefore, it has no effect on the market outcome.

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- If the equilibrium price (\$800) is above the ceiling, it is illegal. The ceiling is now a binding constraint on the price, which causes a shortage. - In the long-run supply and demand are more price-elastic. So, the shortage is larger. - With a shortage, sellers must ration the goods among buyers - A shortage is caused when demand is larger than supply. This is because the price ceiling is lower than equilibrium price therefore, suppliers have less of an incentive to supply therefore, supply decreases. Because the price is lower, more people want the good therefore the demand increases.
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• Spring '13
• TheGlobalMaority

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