Micro 3/1

Elasticity

Elasticity of Supply

  • aka price elasticity of supply
  • producers rather than consumers
  • how much to producers respond to a % change in price
  • same equation
  • equation will always be positive… no need to take absolute value
  • Es>;1: elastic
  • Es<;1: inelastic
  • Es=1: unit elastic

Determinants of Elasticity of supply

  1. # of substitutes: more substitutes, more elastic (farmer in Iowa can switch to other products; economic teachers cannot switch if Econ is no longer relevant)
  2. Time: more time, more elastic (GM in 1970s made gas guzzlers, then late 70s gas crisis, want for fuel efficient cars, cannot switch their cars that quick… inelastic)

Income Elasticity of Demand

  • Consumer response when there is a change in income
  • Yd = %change in quantity demanded / % change in income (income denoted as “y”)
  • write out the formulas before you use it
  • typically positive; normal good, as Yd increases, Qd increases
  • Two types of Normal good: 1) Necessity: between 0 & 1 for you and 2) Luxury: Yd>1; huge increase
  • Perfect necessity: when Yd=0 because quantity demanded stays the same no matter what (as in oxygen)
  • when it is negative, it is an inferior good: Yd<0; Yd increases and quantity demanded decreases

Goods examples

  • Tobacco; Yd .21
  • Furniture; Yd 2.6
  • Macaroni; Yd -.6
  • Mink Coat; Yd 3.4 (luxury)

Cross Price Elasticity of Demand

  • what do my consumers do when the prices of other goods change?
  • how many customers do I lose if Nike lowers its price
  • Xd = % change Qd / % change Py (which is price of competitor0
  • Xd = 0: no relationship
  • Xd>0: positive number, substitutes in consumption
  • Xd<0: negative, compliments in consumption

Cross Price Elasticity of Supply

  • what is my reaction going to be
  • Xs = %change in Qd / % change in Price of competitor (Py)
  • Xs=0: no relationship
  • Xs>0: positive; compliments in production
  • Xs<0: negative; substitutes in production

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