introductory lecture on micro
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Lecture 2, Thursday, September 28
TA Sections begin this Friday (tomorrow) Syllabus may be found on CourseWork Problem Set 1 due next Friday in Sections
LAST CLASS Supply/demand shocks have different effect
on market equilibrium P, Q depending on elasticity of demand/supply
TODAY Elasticities
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Demand Elasticity Measures the responsiveness of quantity demanded to a change in the price of that good.
,DXX P
E =
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Linear Demand Curve D
XX a bP= −
,DXX P
E =
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Demand Curve with Constant Own-Price Elasticity D b
XX aP−=
,DXX P
E =
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An Alternative way to compute elasticity
,DXX P
E =
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Elasticity - Definitions We say that the demand for X is . . . - relatively (own price-) elastic if: -relatively inelastic if: -unitary elastic if: What if E > 0?
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Table 2.1
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Table 2.2 and 2.3
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Demand typically more elastic in long run
Table 2.8
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Price Elasticity and Total Spending Total Spending on good D
XX P X= • [ ]
X
spendingP
∂=
∂
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Price Elasticity & Total Spending (cont…) Intuition:
AS P↑:
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Price Elasticity and Total Spending (cont…)
Linear Demand:
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Demand Curve –vs- Demand Function Demand Curve: displays the relationship between quantity demanded and price, holding all other factors constant. Demand Function: shows the quantity demanded as a function of its own price, the price of other goods, income, etc. e.g. DX =
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We can define other elasticities: 1) Income elasticity of demand for good X:
,DEX I = 2) Cross-price elasticity of demand for good X:
,DYEX P =
3) Price elasticity of supply:
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,DXEX P =
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Example: a demand function for which all elasticities are constant
“Log Linear” Demand: D B C D
X YX aP P I= or. . . .: Take ln
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Elasticities – Interesting Things to Know 1) For a given elasticity and observed price/quantity combination, we can estimate a functional form for a demand curve.
e.g. , 0.8DXEX P =
5
2500X
D
P
X
=
=
if we assume a linear demand: DXX a bP= −
2) Consider the demand function:
D
X Y
IXP P
=+
Confirm that:
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Examples of Income Elasticity Table 2.4
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Examples of Cross-Price Elasticities Tables 2.5 and 2.6
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