1. Prepared for MICROECONOMICS, Ms Bonfig Notes Adapted from Krugman, Wells and Graddy “Essentials of Economics” Third Edition, 2013 and notes from Dr. Julie Mueller

2.  Elasticity is a measure of “price responsiveness”  If demand is elastic, the price elasticity of demand is > 1, or demand is responsive to change.  If demand is inelastic, the price elasticity of demand is < 1, or demand is less responsive to price changes.  If demand is unitary elastic, the price elasticity of demand = 1, or the change in demand is equal to the change in price. InelasticUnitary Elastic 1

4. Demand is….. A. Unitary Elastic B. Elastic C. Inelastic

5. Demand is….. A. Unitary Elastic B. Elastic C. Inelastic

6. Demand is….. A. Unitary Elastic B. Elastic C. Inelastic

8. 1. Availability of substitutes  More substitutes = more elastic ; less substitutes = more inelastic 2. Whether the good is a necessity or a luxury  Luxury good = elastic ; necessity good = more inelastic 3. Share of income spent on the good  Lower price = elastic ; higher price = inelastic 4. Time elapsed since the price change  More time = elastic ; less time = inelastic

9.  Total Revenue is the total value of sales of a good or service.  TR = Price X Quantity Sold  When a seller raises a price, two things happen  A price effect—each unit sells at a higher price, ⇒ revenue increases  A quantity effect—fewer units are sold, ⇒ revenue decreases  Which impact dominates?  Elastic demand: QUANTITY effect dominates, and an increase in price results in a decrease in revenue  Inelastic demand: PRICE effect dominates, and an increase in price result in an increase in revenue  Unitary elastic: The effects perfectly balance, and an increase in price has no change in revenue

11. 1.Find the % change in the consumption of gasoline in the short run. 2.Find the % change in the consumption of gasoline in the long run. 3.Find the relevant numerical quantities for the horizontal axis by finding the amount demanded at $4.00 per gallon 4.Draw and label the demand curve. Gasoline prices increased from about $3.00 per gallon in 2010 to about $4.00 per gallon in 2012. Economists have measured the short run elasticity of demand for gasoline to be about 0.25, and the long run elasticity of demand to be about 0.75. What is the predicted change in consumption of gasoline in the short run? What is the predicted change in consumption of gasoline in the long run? Draw and label a demand curve that reflects the long run elasticity, assuming that at $3.00 per gallon, motorists in the US consume 10 million barrels of gasoline per day.

13. 4. Draw and label the demand curve.

14. Perfectly elastic supply: When even the smallest price changes will lead to drastic changes in the quantity supplied. Perfectly inelastic supply: When the price elasticity is zero, such that changes in the price have no effect on the quantity supplied. VS

15. To be continued when we discusses taxes…

16. Revenue from a Tax

17. Revenue = Tax rate per unit X number of units sold

19.  Deadweight loss is generally less when demand or supply are inelastic  The more elastic demand is, the greater the deadweight loss from a tax  The more elastic supply is, the greater the deadweight loss from a tax