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Econ1,Lesson5,LectureOutline

Economics1Microeconomics
MarkMcNeil
Lesson5Elasticity
IntroMap
I.ElasticityTheGeneralConcept
A. Whentwovariablesarerelated,elaticitymeasureshowresponsiveonevariableistoachangein
theother.
B. Ifresponsive,elasticifnot,inelastic
C. Examples:thedesserttray,my(degenerate)brother
II.Priceelasticityofdemand
A. Theconcept
B. Perfectlyelasticdemandand(themythof)perfectlyinelasticdemandtherearealways
substitutes.
C. Thecoefficientalwaysnegative
D. Totalrevenueeffects
1. Whathappenstototalrevenuewhenpricechanges:

2. Demandandtotalrevenue

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3. Therules
4. Thegraphsof:
a. elasticdemand
b. inelasticdemand
c. perfectlyelasticdemand
d. perfectlyinelasticdemand(themythicalone)

E. Thedeterminants
1. SUBSTITUTES.Ifmany,elasticiffew,inelastic
2. Percentageofthebudget.Iflarge,elasticifsmall,inelastic
3. LuxuryornecessityIfluxury,elasticifnecessity,inelastic
F. Twowrinkles
1. Time.Timeisrequiredforconsumerstobecomeinformedaboutandforproduccersto
providesubstitutes
2. Elasticityandthepricerange:elasticathighpricesandinelasticatlowprices.
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G. Examples:cigarettes,tollroads,payperviewmovies,airlineservices
H. Somerealworldestimatesofelasticityofdemand
III.Priceelasticityofsupply
A. Theconceptandthedefinition(theamountsbywhichproducerschangethequantitysupplied
asaresultofapricechange)
B. Thecoefficientalwayspositive
C. Thedeterminants
1. Timetheimmediatemarketperiodperfectlyinelasticsupply
2. Timetheshortrunmoreelasticsupply
3. Timethelongrunveryelasticsupply

IV.Incomeelasticityofdemand
A.
B.
C.
D.

Theformulathesignmatters
Positiveforanormalgood
Negativeforaninferiorgood
Whocares?

V.Crosselasticityofdemand
A.
B.
C.
D.

Theformulathesignmatters
Ifpositive,substitutes
Ifnegative,complements
Whocares?

VI.ApplicationTheFarmProblem
A. Bothpriceandincomeelasticityofdemandareinelastic.
B. Supply,yearbyyear,isvariable.
C. Whensupplyishigh,totalrevenuesoffarmersfall.Whensupplyfalls,totalrevenuesrise.(Pray
fordisaster?)
D. Thelongrunproblem:toomanyfarmersproducingtoomuchfood
E. Intheearlypartofthiscenturyagriculturalemploymentcomprised25%oftotalemployment.
Todaythenumberislessthan3millionandoutputperworkerhasincreasedeightfold.
F. PerUncleMiltie:whenfarmersaccountedformorethanhalfofthepopulation,farmsupports
wouldsimplybeasituationinwhichthefarmerstaxedthemselvestopayforthesupports.But
nowwithfarmersaccountingforsuchasmallpercentofthepopulation,thereisalargewealth
shiftfromthepopulationgenerallytofarmers.
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