CHAPTER+5+-+ELASTICITY+AND+ITS+APPLICATION

THIS __CHAPTER__ IS ABOUT ....

 * **ELASTICITY ! **

Price elasticity and its application
• Key Terms: ➢ Elasticity→ a measure of how much consumers respond to changes in quantity demanded or quantity supplied. ➢ Price elasticity of demand→ a measure of how much quantity demanded responds to changes in price. ➢ Total revenue→ amount paid by buyers and received by sellers of the good. Total revenue= P x Q ➢ Midpoint method→ formula used for finding elasticity ➢ Elastic demand→ elasticity is greater than 1; changes of consumers’ responses are great. ➢ Inelastic demand→ elasticity is less than 1; changes of consumers’ responses are small. ➢ Unit elasticity→ elasticity is equal to 1. ➢ Income elasticity of demand→ a measure of how the quantity demanded changes as consumer income changes. ➢ Cross-price elasticity of demand→ a measure of how the quantity demanded of one good changes as the price of another good changes. ➢ Price elasticity of supply→ a measure of how much quantity supplied responds to changes in price. http://www.flickr.com/photos/sinagorge/2493891628/

media type="youtube" key="FfZDQLG7FRA&hl=ko&fs=1" height="344" width="425"
 * A good website that I found: http://www.scholarnet.co.nz/demo/eol/shell.php?content=content01.php


 * Main topic/ important ideas: **

**The Elasticity of Supply**


http://img.sparknotes.com/figures/5/5259b727009a2736d6ad639bab3494ff/e2.gif http://www.ecoteacher.asn.au/S&d2/inelass.jpg Graph: originally drawn from the computer



=**Summary:**= =media type="file" key="apecon15 3.mp3"=

Practice problems: 1. Price Quantity Demanded (teachers) Quantity Demanded (students) hello $10 hello 8 notebooks hello hello hi hi 10 notebooks hello $15 hello 6 notebooks hello hello hi hi 9 notebooks hello $20 hello 4 notebooks hello hello hi hi 8 notebooks hello $25 hello 2 notebooks hello hello hi hi 7 notebooks

a. As price goes up from $15 to $20, what are the price elasticity of teachers and students? b. Who is more elastic and why?

2. Look at the chart below, and calculate the price elasticity of supply by using the midpoint formula as the price increases from $3 to $5 for ice cream sellers and hamburger sellers.

b. Are two (A good sellers and B good sellers) price elasticity of supply inelastic? Elastic? Unit elastic? Explain.

1a. Use Midpoint method: __(Q1 – Q2) / [(Q1 + Q2) / 2]__ blahblahblahblahblahblahbl (P1 – P2) / [(P1 + P2) / 2] Teachers: __(6 – 4) / [(6 + 4) / 2]__ blahblah (15 – 20) / [(15 + 20) / 2] = (2 / 5) / (-5 / 17.5)= 34 / -25 = 1.36 Students: __(9 – 8) / [(9 + 8) / 2]__ blahblah (15 – 20) / [(15 + 20) / 2] = (1 / 8.5 ) / (-5 / 17.5) = 17.5 / -42.5 = 0.41
 * Solution:

1b. Teachers are more elastic than students because they don’t need notebooks to give any lectures. They can use the whiteboard, power point, or other methods for their lectures. Students, on the other hand, are more inelastic because they need to take notes in notebooks.

2. a.To calculate the price elasticity of supply of the A good sellers by using the mid point formula, For A good sellers, __(5 – 7) / [(5 + 7) / 2]__ (3–5) / [(3 + 5) / 2] = (-2 / 6) / (-2 / 4) =(-1 / 3) / (-1 / 2) =2 / 3 =0.67

For B good sellers, (9 – 10) / [(9 + 10) / 2] / (-1 / 2) =[-1 / (19 / 2)] / (-1 / 2) =(-2 / 19) / (-1 / 2) =4 / 19 =0.21

b. By looking at the calculation above, we can determine that both price elasticity of supply for good A and B are inelastic. This is because by using the mid point formula, we were able to obtain a number that was less than one. And when the value is less than one, it is said to be inelastic.

Used sources: http://www.youtube.com/watch?v=FfZDQLG7FRA http://img.sparknotes.com/figures/5/5259b727009a2736d6ad639bab3494ff/e2.gif http://www.ecoteacher.asn.au/S&d2/inelass.jpg http://www.ecoteacher.asn.au/S&d2/inelass.jpg