Reading notes--Principles of Economics (chapter5)

Summary

Chapter 5 is Elasticity and its Application. This chapter introduces elasticity(a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants).

Price elasticity of demand

• measure of how much the quantity demanded of a good responds to a change in the price of that good

• Price elasticity of demand =

• Always a negative number. (As price increases, the quantity demanded decreases.)

• absolute value >1 elastic (change in unit quantity demanded is greater the change in unit price)

• absolute value<1 inelastic(change in unit quantity demanded is smaller the change in unit price)

Income elasticity of demand

• a measure of how much the quantity demanded of a good responds to a change in consumers’ income

• Income elasticity of demand=

• Always smaller than 1. Because not all income is used for buying this good.

• If the value is positive, this good is a kind of normal good. (As income increases, the demand for normal goods increases.)

• If the value is negative, this good is a kind of inferior good.(As income decreases, the demand for inferior goods decreases.)

Cross-price elasticity of demand

• a measure of how much the quantity demanded of one good responds to a change in the price of another good

• Cross-price elasticity of demand=

• If the value is positive, good A and good B are substitutes.(As price of good B increases, the demand for B decreases and the demand for its substitutes good A increases.)

• If the value is negative, good A and good B are complements.(As price of good B increases, the demand for B decreases and the demand for its complements good A decreases.)

Price elasticity of supply

• a measure of how much the quantity supplied of a good responds to a change in the price of that good

• Price elasticity of supply=

• Always a positive number. (As price increases, the quantity supplied increases.)

• absolute value>1 elastic (change in unit quantity demanded is greater the change in unit price)

• absolute value<1 inelastic (change in unit quantity demanded is smaller the change in unit price)

Applications

• Total revenue= price * quantity

• For elastic demand, the lower the price, the greater the revenue. (5080 < 65110)

• For inelastic demand, the lower the price, the lower the revenue.（1480 > 1088 ）

Definitions

1. Elasticity– a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

2. Price elasticity of demand– 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

3. Total revenue– the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

4. Income elasticity of demand– a measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income

5. Cross-price elasticity of demand– a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

6. Price elasticity of supply– a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1.In competitive markets, farmers adopt new technologies that will eventually reduce their revenue because_____ (Correct answer: A)

a. each farmer is a price taker

b. farmers are short-sighted

c. regulation requires the use of best practices

d. consumers pressure farmers to lower prices

My wrong answer: D