FILE: 251N04.HTML
BRING
ELASTICITY PROPS
CLASS NOTES
FOR ECONOMICS 251
DR. WILLIAM
SHINGLETON
FALL 2005/WEEK
4/SEPT 13-15
SEP17 DEMAND CH
20+APPNDX
REVIEW QUIZ
IT'S AS EASY AS A, B, C
EXAM SEPT
22
25 MULTIPLE CHOICE/ 3 POINTS EACH
1 25 POINT ESSAY
CLOSED BOOK/CLOSED NOTE/TIME LIMIT
CHAPTER 21 IS NOT ON THIS EXAM
LAST WEEK
COMPARE
MINIMUM PRICE, MAXIMUM PRICE, AND TAX OUTCOMES
ALL REDUCE THE Q THAT IS ACTUALLY BOUGHT AND SOLD
ELASTICITY OF DEMAND
LOGIC
DEFINITION
ELASTIC VS INELASTIC
PERFECTLY ELASTIC/PERFECTLY INELASTIC
REVENUE AND PRICE PATTERNS
PRICE ELASTICITY AND TOTAL REVENUE
LESS COMPLICATED FORMULA
EXAMPLE:
FLORIDA FRUIT PRICE RISE FROM $2.00 TO $2.60
CAUSES QUANTITY TO FALL FROM 300 TO 270 TONS
PCT CHANGE IN Q = [(30/300)*100]-100 = 10PCT
PCT CHANGE IN P =[(.60/2.00)*100]-100= 30PCT
ELASTICITY OF DEMAND = 10/30 = .33
LONG RUN/SHORT RUN
EVERYTHING IS MORE ELASTIC IN THE LONG RUN
EXAMPLES: WINDSHIELD WIPERS, GASOLINE
OTHER
ELASTICITIES
GENERAL RULE FOR CAUSE AND EFFECT
INCOME ELASTICITY
NORMAL AND INFERIOR W/O THE MATH
CROSS-ELASTICITY
SUBSTITUTES VS COMPLEMENTS W/O THE MATH
DEMAND THEORY
UTILITY
THEORY
TOTAL UTILITY/AMAZING ASSUMPTIONS
MARGINAL UTILITY
DIMINISHING MARGINAL UTILITY
CONSUMERS BUY AS LONG AS MU > PRICE
CONSUMER SURPLUS
DEMAND FROM MARGINAL UTILITY
CHOICE THEORY
THE LOGIC OF CHOICE/ REVEALED
PREFERENCE
WHERE THE
BUDGET COMES FROM (AFFORDABILITY)
BUDGET CONSIDERS AFFORDABILITY WITHOUT CONSIDERING
LIKES/DISLIKES/INCOME
WHERE CHANGES IN THE BUDGET SET COME FROM
CHANGES IN INCOME
CHANGES IN PRICES
THE ONLY FACTORS WHICH CAN CHANGE BUDGET SET
TASTES ARE NOT CONSIDERED
PRICES
LIMIT = Y/Px
BUDGET SET
EFFECTS OF
PRICE CHANGES
INCOME CHANGES
IMPLICATIONS
IF WE ASSUME PEOPLE LIKE MORE RATHER THAN LESS
HIGHER INCOMES MAKE PEOPLE BETTER OFF
LOWER PRICES MAKE PEOPLE BETTER OFF
A GOOD SYSTEM WOULD PROVIDE
1. HIGH INCOMES AND
2. LOW PRICES
INDIFFERENCE CURVES
SHOW TASTES WITHOUT COST CONSIDERATIONS
INDIFFERENCE CURVE ASSUMPTIONS
NON-SATIATION
DIMINISHING RETURNS
EXPLAIN PARTITION
LIMITS TO
INDIFFERENCE CURVES
ONLY DRAW ONES WE ARE INTERESTED IN(COMPLETENESS)
NO CURL BACK
NO INTERSECTION
BOTH ILLOGICAL
BUDGETS AND CHOICE THEORY
SHOW CHOICE PROCEDURE
EFFECT OF PRICE CHANGE
EFFECT OF INCOME CHANGE
SUMMARY OF
CHOICE THEORY
1. START AND END AT EQUILIBRIUM
2. LABEL EVERYTHING
3. IDENTIFY AND LOGICALLY DEFEND EACH AND EVERY CHANGE
4. AT ANY MOMENT IN TIME
ONLY ONE CHOICE IS RELEVANT
ONLY ONE INDIFFERENCE CURVE IS RELEVANT
ONLY ONE BUDGET CURVE IS RELEVANT
5. THE EMPHASIS IS ALWAYS ON "WHY?"
6. THE EXPLANATION IS THE IMPORTANT PART OF THE ANSWER
DEMAND CURVE CONSTRUCTION
INDIVIDUAL DEMAND TO MARKET DEMAND