ECON 1 Lecture Notes - Lecture 7: Deadweight Loss, Economic Surplus, Price Ceiling
4/24/18
- Variety of supply curves
o The slope of the supply curve is closely related to price elasticity of supply
o Rule of thumb:
▪ The flatter the curve, the bigger the elasticity
▪ The steeper the curve, the smaller the elasticity
- 5 different classifications of S curves
o Perfectly inelastic (one extreme)
▪ Selles’ pie sesitiit: oe
▪ If pie ises, uatit does’t hage
▪ Elasticity = 0
▪ Ex: concert tickets
o Inelastic
▪ Selles’ pie sesitiit: elatiel lo
▪ If price rises, quantity rises
▪ Elasticity < 1
▪ Ex: properties, airplane production
o Unit elastic
▪ Selles’ pie sesitiit: iteediate
▪ Elasticity = 1
o Elastic
▪ Selles’ pie sesitiit: elatiel high
▪ If quantity rises more than 10%, price rises by 10%
▪ Elasticity > 1
▪ Ex: canned goods
o Perfectly elastic (other extreme)
▪ Soethig eteel heap to iease it’s podutio a lot
▪ Selles’ pie sesitiit: etee
▪ Elasticity: infinity
▪ Pie does’t hage uatit a hage a %
▪ Ex: toothpicks, software
- How the price elasticity of supply can vary
o As q rises, supply often becomes less elastic
o As we move along the S curve, it become more steep, aka slope becomes <1 and so less elastic
▪ Means that it costs a lot to produce this good
o Beyond equilibrium, producers would be out of business
- Income elasticity of demand: measures the response of QD to a change in consumer income
o Income elasticity of demand: (percent change in QD) / (percent change in income)
o An increase in income → increase in demand for a normal good
o Normal goods, income elasticity > 0
o Inferior goods, income elasticity < 0
o The income elasticity of demand can be used to distinguish normal from inferior goods
o Luxury goods, income elasticity is > 1
- Cross price elasticity of demand: measures the response of demand for one good to change in the
price of another good
o Cross price elasticity of demand = (% change of QD for good 1)/(% change in price of good 2)
o Substitutes, cross price elasticity > 0
o Complements, corss price elasticity < 0
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