Lecture Notes on Elasticity - Principles of Microeconomics | ECON 2620, Study notes of Microeconomics

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Elasticity

the measure of how a buyer reacts tothe change in a money measure whicheffects the quantity of a commodity.

The real question is, How do we^ measure the quantity response^ to the dollar change? The Equation

The Graphs

Revenue Test

• Very precise value.• Conforms to a set ofrules established tomeasure the impact.• Theory studiesrequire inclusion.• Must be very careful.• Sometimes a question.• Historical data.
• Supply - limited value• Demand - very clearpicture of loss/gain.• Must know scales.• Serious violations oflogic are possible:- rise/run.- normal goods.• Requires extra work.
• Have data needed.• Always correct• In terms managerwants to know.• Check sign (+,-).• No questions.• Logic clear.• No special rules.• Often obvious.

Elasticity

the measure of how a buyer reacts tothe change in a money measure whicheffects the quantity of a commodity.^ E^ =^ d^

% change in Quantity% change in Dollar Value

%^ Q P%

=

-^ Price of the commodity in question•^ Income of the buyer•^ Price of another commodity•^ Conditions in an associated market

Elasticity

the measure of how a buyer reacts tothe change in a money measure whicheffects the quantity of a commodity.^ E^ =^ d^

% change in Quantity% change in Dollar Value

%^ Q P%

= There are about 45 equationsrecognized by economists.Which should be used?

Elasticity

the measure of how a buyer reacts tothe change in a money measure whicheffects the quantity of a commodity.

D Inferior Good •^ Small price change.•^ Large quantitychange

D Superior Good • Large price change• Small quantitychange. Normal Good •^ equal price andquantity change

D Elastic^

Unitary^

Inelastic

Elasticity

the measure of how a buyer reacts tothe change in a money measure whicheffects the quantity of a commodity.

The Revenue Test