Chapter+5+KELSERICAJENNLINDS

=Chapter 5: Elasticity and Its Application =

If a product of a good is **//INELASTIC//**, the good is usually necessary like: TOOTHBRUSH, RICE, SOAP
**ONE THING TO KNOW IS THAT *GOODS TEND TO HAVE MORE ELASTIC DEMAND OVER LONGER TIME HORIZONS*

Think about the price of gasoline. IF THE PRICE RISES, people aren't going to just SUDDENLY NOT-CONSUME the product because its just so inevitable for him/her to suddenly not drive to work. HOWEVER, about months/years later, he/she will come up with a new solution: ditch the CAR and befriend public transportation. THIS WILL RESULT in the Quantity of gasoline demanded to drop significantly!**  **Price elasticity of demand is= a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price.**

THIS IS HOW YOU CALCULATE the ELASTICITY OF DEMAND
 * [[image:http://upload.wikimedia.org/math/2/5/2/2528a58fb0ab0eef01ed6afb8bfb32fd.png]]



HOWEVER, if you try to calculate price elasticity between two points, you may come across a problem: that the elasticity from the point A to B is different form point B to A THUS, you use the MIDPOINT METHOD TO AVOID THIS PROBLEM

__(Q1 – Q2) / [(Q1 + Q2) / 2]__ (P1 – P2) / [(P1 + P2) / 2]

OTHER DEMAND ELASTICITIES are

1.** __The Income Elasticity of Demand__
 * = Percentage change in quantity demanded/ percentage change in income**

__2. The cross- price elasticity of demand__ 
 * =% change in Q of demanded good 1 / % change in P of good 2**

**TAX REVENUE:** PRICE X QUANTITY **or the amount paid by buyers and received by sellers**
elastic --> **Price **and** //total revenue// **OPPO DIRECTION Inelastic-->**Price **and** //total revenue// **SAME DIRECTION Elasticity=1= unit elasticity
 * 

The Elasticity of Supply : measures how much the quantity supplied responds to a change in price of a good

THIS IS HOW YOU COMPUTE THE PRICE ELASTICITY OF SUPPLY  = __%CHANGE IN QUANTITY SUPPLIED__ S% % CHANGE IN PRICE



NOW...LETS FIND THE THE SHIFT OF DEMAND AND SUPPLY CURVE

Demand curve shifts upwards (to the right) when there is an increase in demand and vice-versa Supply curve shifts (to the right) when there is an increase in supply and vice-versa

VIDEOS**

=Economics Demand and Supply Curves= media type="youtube" key="qdOqAWo8vFw" width="425" height="350"

media type="youtube" key="M2EVwUa8HYA&feature=related" width="425" height="350"


 * QUESTIONS TO SOLVE**

1. When demand is relatively elastic, a 10% increase in price will a. increase TR by more than 10% b. increase TR by less than 10% c. decrease TR by more than 10% d. decrease the TR, but it is unknown whether it will be by more or less than 10%

2. A vertical supply curve may be described as being a. relatively price elastic b. perfectly inelastic c. relatively inelastic d. perfectly elastic

Answer: 1-d 2-d

Citations** http://www.scholarnet.co.nz/member/courses/eol/data/images/a4n7.gif http://www.agbioforum.org/v7n4/v7n4a07-f01.gif http://www.benbest.com/polecon/shift.gif http://www.answers.com/topic/price-elasticity-of-demand http://tutor2u.net/economics/content/diagrams/supplyelasticity2.gif