Chapter 4 Notes Principles Of Microeconomics

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