Download ECON 1110 Sanders

ECON 1110
Professor Sanders
Fall 2016
WEEK 7: LECTURE 1 of 2
Monday, October 2nd
Lecture Keywords: Elasticity, Inelastic, Unit Elastic, Price Effect, Quantity Effect, Total Revenue
Minimum Wage in the Real World
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Our price floor model predicts a binding minimum wage should lower overall employment
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Can we test whether or not that’s true?
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“minimum wages and employment: A Case Study of the Fast-Food industry in New Jersey”
The Basic idea
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New Jersey’s min. wage got raised from $4.25 to $5.05
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Pennsylvania min. wage was unchanged
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Competitive market price floor theory predicts we should see a relative employment decrease
in NJ
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Bust observe no change in employment
On the Other Had?
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Used limited sample based on phone calls to businesses
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Meer and West look at data across long period in US
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Find:
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Decrease in number of new hires
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Suggests firms may not fire, they just don’t hire to replace those that leave
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High turnover in minimum wage jobs
Back to Theory
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DWL - loss to society that represents the potential gains from trade – resulting from intervention
Price Elasticity of Demand
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(% change in quantity demanded) / (%change in price)
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measure of responsiveness to price
Elasticity Extremes
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Perfectly elastic demand- any change in price causes an infinite change in quantity demanded (slightest change in price causes people to drastically change how much they want
of something)
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Perfectly inelastic demand – demand has no responsiveness in price
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In between
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Inelastic -1% change in price causes LESS than 1% change in Q demands
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Unit elastic – 1% change in price causes 1% change in Q demands
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Elastic -1% change in price causes MORE than 1% change in Q demands
Demand curves of different elasticities and the role of price
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Same size price change can give different quantity demand changes
Elasticity Across Demand Curve
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Need not be the same across all points on the demand curve
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Most aren’t
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On linear curve (not perfectly elastic/inelastic), moving down curve means elasticity decreases
Other Types of Elasticity of Demand
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Very similar to own price, now percentage change in quantity demanded with percentage
change in price of the other good
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Substitute – when price of one good rises, so does the price of other good
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Ex: Chicken and Beef
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Cross price elasticity is positive
Complement –goods are consumed jointly, when price of good rises, price of the other good
decrease
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Ex: hot dogs and ketchup
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Cross price elasticity is negative
Other Types of Elasticity of Demand: Income
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Now percentage change in quantity demanded with percentage change in income
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Normal goods – as you make more money, you demand more of those goods
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Inferior goods –when your income rises you buy less of them
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Negative income elasticity
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Ex: hot pockets – super cheap – as income increases, switch to better food
Income inelastic – necessity goods where even if you consume more as income goes up, you
do not consume them at the same rate
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Positive income elasticity
Income inelastic – income elasticity of demand < 1
Income Elastic – luxury
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Consume more and more as income goes up
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Income elasticity of demand > 1
What about Supply?
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Supply elasticity is positive
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The higher the price, the greater the quantity supplied
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Still devoid of units
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How does quantity supplied, change as the price changes
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Always expect this to be a positive number
Factors that influence price elasticity of supply
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Short v. long run
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More elastic in the longer run – more time to change your behavior
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Ex: gas prices
Availability of inputs
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Are things you need to make it cheap or expensive?
Extremes of price Elasticity of Supply
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Perfectly inelastic
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perfectly elastic
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0
infinite
and everywhere in between (curve shape)
Price Elasticity of supply
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more realistically, elasticity of supply falls somewhere between 0 and infinity
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what’s more supply elastic
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gold or donuts?
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Solar panels or firewood?
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Airline tickets or taxi cab rides?
Interactions between Supply, demand, elasticity
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Same shift in demand, but supply curves with different elasticities…how does that drive the
price/quantity change? Why?
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Inelastic (supply curve shifts upward a lot) – upward pressure on price doesn’t do much
to change people’s behavior – little response = harder to reach equilibrium, so must
change price a lot just to get buyers to change a little
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Elastic supply – little move on price causes large change in behavior, easier to get to
equilibrium
Elasticity to total revenue changes
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Own price elasticity tells us how revenue (the money firms take in) chages as price changes
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Revenue = P * !
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Generally when P rises (falls), Quantity demanded goes down (up)
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So any change in price impacts total revenue two ways
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Price effect
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Quantity effect
Total Effect When Price Rises?
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If demand is inelastic (<1) then the price effect dominates and Total revenue goes up when
price rises
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If demand is elastic (>1) then the quantity effect dominates and total revue goes down when
price rises
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If demand is unit elastic (= 1), they cancel each other out and total revenue is unchanged
Back to Earlier Example
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Calculate change in total revenue by piece…remember revenue was 7/3? So do we expect
lowering price from A to B will rise or lower total revenue?
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Price effect- loss caused by price going from $8 to $6
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Quantity effect- in exchange for changing the price, get to sell 2 more units that that price
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Total revenue – now goes up
What about Further Down
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effect changes as we move along
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price effect bigger than quantity effect – elasticity must be less than 1 b/w C and D = inelastic
Price Elasticity of Demand and Total Revenue
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At Some point, lower price ceases to increase revenue
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Happens when we cross from elastic to inelastic
Careful – just because we know which effect dominates (price v. quantity), we still have to
think through the impact on total revenue
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Price and quantity effects always move in opposite direction, but which one is positive
and negative varies based on increasing or decreasing price