ECN Midterm Review

Price Ceilings/floors -> Shortages/Surplus

Elasticity
Relationship Between revenue and elasticity
Determinant of elasticity

Applications of Price Elasticity of Supply

Antiques and reproductions
o Antiques: Highly inelastic supply
o Higher Income -> higher demand
o Inelastic supply + higher demand = higher price
o Reproductions: more elastic supply
Volatile Gold Prices
o Gold production: costly and time consuming
o .: inelastic supply
o Demand is much more elastic
o Relatively small changes in demand = relatively large
changes in price
Cross Elasticity of Demand
o % Change in Q demanded of product X / % change in P of
product Y
o Substitute goods positive sign
o Complementary goods negative sign
o Independent goods near zero
Application: Coke Vs. Sprite
Low cross elasticity
Coke & Sprite are weak substitutes
Application: Assessing Competition
Government: Whether a proposed merger between
two larger firms will substantially reduce competition
High Cross elasticity
Less competition = less consumer choice
Very strong substitutes
Can create a monopoly .: the government
should block the merger
Income Elasticity of Demand
o % Change in Q demanded / % change in income
o Normal goods Positive sign
o Inferior goods Negative sign
 Income Elasticity of Demand and Growth of the Economy
Income elasticity helps explain the expansion and contraction of
industries as the economy grows with rising income
Which industries will be expanding and which will be declining?
o Expansion of industries producing output that have high
income elasticity
Ie: Cars, electronics, housing, etc
o Contraction or slower growth fo industries that have low
income elasticity
Ie: agriculture
Elasticity and Tax Incidence:
o Unit Elasticity of Demand:
Taxes will cause Supply to shift to the left
Consumer Burden: amount of price increase
Firms Burden: tax consumer burden
o Elastic Demand:
Supply shifts leftward
Consumer burden is less than the firms burden
o Inelastic Demand:
Supply shifts leftward
Consumer burden is larger than the firms burden
o Elastic Supply:
Supply shifts left
Consumer burden is larger than the firms burden
o Inelastic Supply:
Supply shifts left
Consumer burden is less than the firms burden
o More elastic demand favours buyers
o More elastic supply favours sellers
Perfectly
Perfectly Elastic
Inelastic
Demand Sellers Buyers
Supply Buyers Sellers

P
Demand Supply Q Change
Change
Short Less Less
Greater Smaller
Run Elastic Elastic
Long More More Smaller Greater
Run Elastic Elastic