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Notes For A Freshmen College Microeconomics Course.

5697 words - 23 pages

CHAPTER 20DEMAND AND SUPPLY ELASTICITYI. Price Elasticity of DemandA. Concept of Price ElasticityThe responsiveness or sensitivity of quantitydemanded to a change in price.B. General Formula for Price ElasticityPercentage change in quantity demandedPercentage change in priceC. Mid-Points FormulaE/demand =D. Interpreting the Elasticity CoefficientA coefficient higher than 1 is elastic" " lower " 1 is inelastic" " exactly 1 is unitaryA negative coefficient implies that a lowerprice results is lower quantities sold.E. Extreme ElasticitiesPerfectly Elastic Perfectly InelasticDemand or Supply Demand or SupplyII. Total Revenue TestIf Demand is Elastic If Demand is InelasticP TR P TRP TR P TRIII. What Determines Price ElasticityA. The number and quality of substitute goods.B. The proportion of income the purchase makes up.C. The size of the expenditure.D. The time available for adjustments.E. Luxuries tend to be elastic.F. Necessities tend to be inelastic.G. Durable goods tend to be elastic. H. Promotion.IV. Cross Elasticity of DemandShows whether two goods are substitutes orcomplements.Cross Elasticity Percentage Change in QFormula Percentage Change in PIf two goods are substitutes, the coefficient will bepositive.If two goods are complements, the coefficient will benegative.V. Income Elasticity of DemandShows the responsiveness of certain goods to changesin real consumer income.Income Elasticity % Change in Q DemandedFormula % Change in Real IncomeIncome-sensitive products have a coefficient higherthan 1.The coefficient will vary according to income level.VI. Elasticity of SupplyShows the responsiveness of quantity supplied to achange in price.General Percentage Change in Q SuppliedFormula Percentage Change in PriceDeterminants of Supply ElasticityA. Short-Run Period (inelastic supply)B. Long-Run Period (more elastic supply)C. Market Period (short= inelastic; long= elastic)VII. Applications of Price Elasticity of S and DA. Wage bargaining (wage give-backs may save jobs ifthe product is income-sensitive/ elastic)B. Bumper crop in agriculture (will reduce the totalrevenue of farmers, since products are inelastic.)C. Automation (if the product is elastic, workersdisplaced by automation, may be rehired)D. Deregulation (works well on elastic goods)E. Excise taxes, sin taxes (should be applied toinelastic goods in order to enhance tax revenue)CHAPTER 21THE FINANCIAL ENVIRONMENT OF BUSINESSI. The Legal Organization of FirmsA. Single Proprietorships (over 13 million, 74.3%)Advantages:1. Easy to organize2. The owner is his own boss3. All profits go to the ownerDisadvantages:1. Unlimited liability2. Limited financial resources3. Owner is responsible for all decisionsB. Partnerships (1.7 million, 7.1%)Advantages:1. Easy to organize.2. Easier to raise capital.3. More specialization in management.Disadvantages:1. Unlimited liability2. Each partner is responsible for the actionsof all other partners.3. Division of authority leads to discord4. The withdrawal of one...

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