Chapter 4 Notes on Econ 1A

-Price changes as Qd changes along the demand curve

-price elasticity tells you how strongly buyers (Qd) react to a price change
-slope of the demand curve (∆P/∆Qd)

-Price elasticity= E = (∆Q/Q) / (∆P/P)

-E is measured in absolute terms
-demand for a good is called:
-elastic if E is greater than 1
-unit elastic if E is equal to 1
-inelastic if E is between 0 and 1

-determinants of price elasticity of demand

-substitution possibilities
-if easy to find substitute then it is elastic
-if difficult to find substitute then it is inelastic
-budget share
-cheap then it is inelastic
-if expensive then it is elastic
-time horizon
-goods tend to have more elastic demand in the long run
-price of gas rises
-in the short run, Qd decreases only slightly
-in the long run the Qd for gas decreases substantially
-Price Elasticity changes along the demand curve (straight line)
- in general assume the demand curve is a straight line
-near the top of the demand curve E >1
-near bottom of the demand curve E<1
-Two special cases
-if it is a horizontal curve then E=infinity
-if it is a vertical curve then E=0

The total expenditure is the P*Q

-Price Elasticity of supply

-in general, E changes along the supply curve
-‘a special case’- if supply curve goes through the origin (vertical intercept is zero), E is
always zero
-special cases
-if supply curve is vertical then it is perfectly inelastic
-if supply curve is horizontal then it is perfectly elastic

-determinants of supply elasticity

-flexibility of sellers to change the amount of production
-if price increases it affects the Quantity supplied
-time
-supply is more elastic in the long run than in the short run
-in the long run, firms can build or close factories to adjust Quantity
supplied
-in the short run, firms cannot change the size of factories